United States: Will Recent Decisions of the Delaware Chancery Court Finally Curb Excessive M&A Litigation?

Last Updated: September 9 2013
Article by Andrew J. Noreuil

Keywords: M&A transactions, shareholder litigation, disclosure,

The Delaware Chancery Court has issued three decisions in 2013 that demonstrate the court's willingness to rein in the excessive and often frivolous litigation challenging public M&A transactions.

Recent trends in shareholder litigation illustrate the magnitude of the litigation issues facing corporations in public M&A transactions. Of the public company acquisition transactions with a value over $500 million that were announced in 2007, 53% were challenged in shareholder litigation. By 2012, 96% of such transactions were subject to shareholder suits, with an average of 5.4 suits filed for each deal. In addition, for Delaware target corporations valued at over $100 million, 65% of the M&A deals announced in 2012 were subject to litigation in Delaware and in at least one other jurisdiction (usually the jurisdiction where the corporation's principal place of business is located). Finally, for shareholder suits in deals over $100 million that were announced in 2012 and ultimately settled, shareholders received only supplemental disclosures in 81% of such settlements (so-called "disclosure-only settlements"), with plaintiffs' attorneys fees and expenses being the only cash paid out by defendants in such suits.

On June 25, 2013, Chancellor Leo Strine, Jr., issued his opinion in Boilermakers Local 154 Retirement Fund v. Chevron Corporation and its consolidated companion case, IClub Investment Partnership v. FedEx Corporation, holding that bylaws that specified the forum for litigation related to the internal affairs of the defendant Delaware corporations and that were adopted by their boards of directors were valid under Delaware statutory law and were facially valid contractual forum selection clauses. Specifically, the bylaw adopted by the FedEx board of directors provided that the Delaware Chancery Court would be the sole and exclusive forum for derivative suits brought on behalf of the corporation, actions asserting a breach of fiduciary duty owed to the corporation or its stockholders by the directors, officers or employees of the corporation and actions asserting a claim arising under Delaware's corporate statute or governed by the internal affairs doctrine. Similarly, the Chevron bylaw provided that the forum for such actions could be filed in any Delaware state or federal court with subject matter jurisdiction and personal jurisdiction over the parties and that the bylaw would not apply unless the applicable court had personal jurisdiction over the indispensible defendant parties.

In its analysis, the court stated that the forum selection bylaws regulate a proper subject matter under Delaware's corporate statute and that, as a contractual matter, the stockholders assented to the forum selection bylaws because the boards of directors had the authority under the corporations' respective certificates of incorporation to unilaterally adopt bylaws. The court also noted that, under applicable law, a plaintiff may defeat the enforcement of a forum selection bylaw by showing that as-applied the enforcement of the bylaw would be unreasonable or that the bylaw should not be enforced because the bylaw is being use for improper purposes inconsistent with the directors' fiduciary duties.

Notwithstanding the issues resolved by the Delaware Chancery Court's holding in the Chevron case, the key factor in determining whether forum selection bylaws will be effective in reducing multi-jurisdictional litigation will be whether judges in states other than Delaware enforce such bylaws. For example, in 2011, a California federal court refused to enforce a Delaware corporation's board-adopted forum selection bylaw on the grounds that the board's adoption of the bylaw amounted to an attempted unilateral amendment of the corporation's bylaws and, as a matter of contract law, was not valid because there was no mutual consent of the plaintiff stockholders to such amendment.1 In the Chevron decision, the Delaware Chancery Court expressly rejected the California court's reasoning as a matter of Delaware law. However, while non-Delaware judges presumably would not reject the Delaware Chancery Court's interpretation of Delaware law with respect to the validity of forum selection bylaws, it is far less clear how such courts might apply the reasonableness requirement for enforcement of forum selection bylaws on a case-by-case basis.

If judges outside of Delaware enforce forum selection bylaws, absent a successful as-applied challenge, stockholder litigation in connection with a public M&A transaction involving a Delaware target corporation with a forum selection bylaw will be heard and decided in Delaware courts. Accordingly, multi-jurisdictional litigation in connection with public M&A transactions could be curbed and the inefficiencies of simultaneously defending the same claim in multiples forums, including wasteful duplication of legal expenses, would not continue to be borne by Delaware target corporations and their stockholders.

In a transcript ruling on February 28, 2013, in In re Transatlantic Holdings Inc. Shareholders Litigation, Chancellor Strine rejected a class action disclosure-only settlement that had been proposed by plaintiffs and not objected to by the defendants. Stating that additional disclosure should "contradict or meaningfully affect the flow of information in a way that's different from what the board is suggesting," Chancellor Strine concluded, that, despite having been given multiple opportunities, the plaintiffs had failed "to explain in any rational way why the disclosures that they had obtained were in any meaningful way of utility to someone voting on the merger." The court also refused to certify the proposed plaintiff class because the two named class representatives, one of whom did not vote on the merger and owned only two shares and the other who could not remember whether he had voted on the merger and did not keep any records, would not be adequate class representatives.

While the Chancellor was sympathetic to the desire of the defendants to settle non-meritorious litigation and put it behind them, he could not approve the class certification and foreclose the possibility, however unlikely, that a more diligent plaintiff could come forward with a damages claim in the future.

On March 19, 2013, Vice Chancellor Sam Glasscock III issued a letter ruling in In re PAETEC Holding Corp. Shareholders Litigation regarding the award of attorneys fees for a previously approved disclosure–only settlement in which, as the court noted is customary for such settlements, the defendants agreed not to oppose a fee request by plaintiffs' counsel up to a specified amount. The supplementary disclosures that plaintiffs' counsel extracted from the defendants were (i) that certain employees of the acquiror's financial adviser working on the transaction had previously worked for PAETEC and had access to its confidential information, (ii) that PAETEC's CEO stated to the acquiror on two occasions that he did not expect to have a continuing role in the combined entity after the merger, (iii) the reasons why PAETEC hired each of its financial advisors, (iv) the fact that PAETEC's entry into an exclusivity agreement with the acquiror precluded it from negotiation with two other bidders during the exclusivity period, (v) certain information regarding the valuation that each of PAETEC's financial advisors assigned to PAETEC's net operating losses, (vi) the reasons why PAETEC did not pursue a potential proposal from another bidder and (vii) the effect of synergy realization on the cash flow accretion/dilution analysis for the acquiror.

Before addressing the substance of the plaintiffs' fee request, the court rejected the plaintiffs' argument that, absent collusion, judicial scrutiny of unopposed fee requests was not appropriate. The court noted that the agreement of the defendants not to oppose a fee award of a certain level was not an agreement by the defendants as to the amount of attorneys fees requested by the plaintiffs up to a specified level or an expressed desire that the defendants wanted their decision not to oppose a fee of a specified level to be a substitute for the court's independent judgment of an appropriate fee. In addition, the court stated that judicial scrutiny of fee requests in disclosure-only settlements is particularly warranted because in such settlements there is a risk that the plaintiffs and the defendants have agreed to trivial additional disclosures that generally do not expose the defendants to liability for money damages and that both sides have chosen the path of "least resistance" to obtain a release of claims for the defendants and fees for the plaintiffs' attorneys. Accordingly, the court concluded that it is proper for the court to scrutinize a disclosure-only settlement substantively and to determine whether the settlement confers any benefit on the plaintiff class.

The court held that, with the exception of the disclosure regarding the acquiror's financial advisor, none of the other supplemental disclosures provided for in the settlement justified any amount of fees to be awarded because such disclosures were of "such doubtful materiality." The court noted that such disclosures either went to a level of detail not required to be disclosed under Delaware law or were trivial and only of marginal utility. Accordingly, the court's entire fee award was based on the single item of supplemental disclosure regarding the existence of a conflict of interest for the acquiror's financial advisor, which, based on recent cases, the court recognized as an important area of disclosure. Aside from the conflict disclosure, however, the court stated that the remaining supplemental disclosures did not warrant an award of any amount of attorneys fees in the case.

The Delaware Chancery Court's 2013 decisions thus far offer an encouraging sign that wasteful multi-jurisdictional litigation and weak disclosure-only settlements may be less likely to succeed in the future. It remains to be seen if these recent decisions will have any deterrent effect and begin to turn the tide on the filing of non-meritorious lawsuits in connection with public M&A transactions.

Originally published September 5, 2013

Learn more about our Mergers & Acquisitions practice.

Visit us at mayerbrown.com

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2013. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.