As we reported in 2014, United States post-deal litigation became more of a rule than an exception in the early-to-mid 2010s, with over 95% of M&A transactions attracting litigation. In many cases, a single deal could result in multiple suits distributed across state jurisdictions. The majority of these actions were "disclosure-only", aimed at prompting the target company to make additional disclosure (and generally resulting in large fees for plaintiffs' counsel) and drew a great deal of criticism from lawmakers and jurists. However, changes may be on their way, led by the state of Delaware.
Delaware developments
In the last two years, a series of Delaware decisions has begun to curtail the post-deal litigation trend. In 2015, Corwin v. KKR Fin. Holdings LLC established the business judgment rule as the standard of review in post-closing damages litigation. The next year, re Trulia rejected a disclosure-only action that would not have resulted in substantial benefit to shareholders. Delaware courts have also recently begun enforcing forum selection clauses in deals in efforts to hamper multi-jurisdictional deal challenges.
A recent paper published by the University of Pennsylvania Law School (the Paper) evaluates the impact that these recent jurisprudential changes have had on the Delaware M&A litigation landscape. Notably, the authors discovered that the percentage of Delaware deals subject to post-closing actions halved between 2015 and 2016, declining to 32%. During the same period, the percentage of settlements rejected by the court rose from close to 0% to around 20% and median attorneys' fees declined from $500,000 to $275,000. Furthermore, there is evidence that the changes in Delaware have affected the national rate of litigated deals, which declined from 93% to 84% between 2013 and 2014 and more substantially to 64% in 2016. The national decline may be partly attributed to the disappearance of multi-jurisdictional actions related to Delaware matters as a result of forum selection provisions.
Too much of a good thing?
The changes brought on by the Delaware decisions are not without their drawbacks. The authors of the Paper warn that over-zealous restrictions on post-deal litigation is likely to dissuade legitimate claims and thus allow target company boards to act without fear of reprisal. Furthermore, the authors stressed the importance of Delaware's balancing act to remain the top destination for corporate residency. With other states such as Nevada and New York (in which a state court recently opted not to follow re Trulia) already competing for Delaware's position, it could be risky to adopt overly defensive standards.
Creative adaptations
The authors of the Paper assert that creative counsel have found and will likely continue to find ways to adapt to the changes. Already, the authors noted a rise in motions for dismissal combined with "mootness" fees as an alternative to traditional challenges (whereby if the plaintiff can establish that an action has resulted in disclosure mooting the litigation, the parties can settle and the defendants generally pay a voluntary "mootness fee" to plaintiff's counsel). Furthermore, more claims are being brought in federal court, which are outside the restrictions imposed by forum selection clauses. Finally, despite recent limitations on appraisal remedies in Delaware, these actions are more prevalent each year, filling the vacuum left by traditional challenges that have become no longer viable.
Canadian perspective
As we discussed in a previous article, while post-deal litigation has never been as prominent in Canada as it has south of the border, it does still occur. It would therefore benefit Canadian dealmakers to keep informed of the developing scenario in the United States, and in Delaware in particular, which is often looked to by Canadian courts regarding matters of emerging corporate law.
The author would like to thank Peter Charbonneau, Articling Student, for his assistance in preparing this legal update.
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