Until recently, merger news followed almost a formulaic path: announcement, followed by a lawsuit on behalf of shareholders, proceeding to a settlement that covered the legal fees and allowed the acquisition to complete. Now one judge’s actions have put a dent to the appetite for such suits, reports the Wall Street Journal.
Since an overwhelming number of these cases are filed in Delaware and mostly land in Delaware Court of Chancery, the distaste of one judge, Vice Chancellor J. Travis Laster, for such practice has made the difference.
In fact, when lawyers hear that their case will be heard in Judge Laster’s courtroom, some simply drop the suit. This was the case late last year in the allegations that Dyax Corp. was shortchanging investors by selling itself too cheaply, according to the Wall Street Journal.
The Journal has reported in a series of articles going back almost two years that these lawsuits were filed on the grounds that shareholders did not get a fair price in the sale of the company. The companies seeking to sell themselves often agreed to paying a settlement between about $400,000 to $500,000, and also agreed to offer more disclosure. The selling price pretty much remained unchanged. In other words, lawyers sued on behalf of shareholders but accepted to settle the cases when they got paid.
In a few instances, disclosures resulted in finding wrongdoing. In most cases, however, the settlements freed the companies to pursue the M&A plans and helped them avoid protracted legal wrangling.
Probably because it was so easy and predictable, such lawsuits rose for a great number of years. According to a Journal article on this subject, in 2014, shareholders challenged 93% of corporate mergers, up from 44% in 2007.
A study by Cornerstone Research found that only one of the suits filed in 2014 went to trial, resulting in a $76 million damages award. An overwhelming majority, 80% of the settlements in 2013 and 2014, provided only additional disclosures.
But in 2015, Judge Lester in effect put the spotlight on the lawyers. In July, for instance, he rejected a settlement in the sale of Aeroflot Holding Corp. declaring plaintiffs’ lawyers had done “nothing, zip, zero” for investors, the Journal reports.
Few months later, he shut down a settlement related to Hewlett-Packard Co.’s acquisition of Aruba Networks Inc, and admonished the attorneys for following “the path to getting paid,” without any yield for shareholders.
Several other Delaware judges have followed Judge Laster’s lead and become critical of the “disclosure only” pacts; rejecting the settlements or asking for more proof that the settlements are in fact in the interest of shareholders.
That’s giving lawyers pause to file suits against mergers and acquisitions.
In the fall, lawyers challenging the sale Advent Software Inc. to SS&C Technologies Holding Inc. abandoned negotiating a disclosure-only settlement upon hearing of the court’s ruling in the Aruba case, the Journal reports. Lawyers also decided to drop the suit over the sale of Orbitz Inc.
“It’s clear that the ground rules have changed, and changed dramatically,” James Maloney, a litigator at Andrews Kurth LLP who defends against shareholder suits, told The Wall Street Journal.
Accordingly, in the first nine months of 2015, 78% of Delaware companies that sold themselves in deals valued at $100 million faced at least one lawsuit. However, that number nearly halved to 34% in the last three months of the year, “after Mr. Laster began aggressively shooting down settlements.”
“The heyday of ‘file a case, make $500,000’ is clearly over,” Seth Rigrodsky, a plaintiffs’ lawyer based in Wilmington who brought the Dyax case, told the Journal.
So far Delaware has been home to more than 80% of these challenges, According to Cornerstone Research. The question, as raised in the Journal article, is whether lawyers would decide to challenge M&A cases in other jurisdictions.