The takeover litigation boom has ended.For years, companies have complained that nearly every acquisition attracts a flurry of lawsuits. Nearly 95 percent of all deals in 2014 had a lawsuit.
But a new study by myself [Steven Solomon] and Matthew D. Cain, an economist with the Securities and Exchange Commission, finds that this all changed in 2015. A Delaware court crackdown on takeover litigation has driven the litigation rate to less than 22 percent.
In previous years, takeover litigation was commonplace. The high rate was compounded by the fact that much of the litigation was so-called multijurisdictional litigation. More than half of the public companies in the United States are incorporated in Delaware but have headquarters elsewhere.
This gives lawyers a choice to sue either in Delaware or in a company's home state. Not surprisingly, lawyers tried to manipulate the system by bringing suits in multiple jurisdictions and then proceeding where the case would be most favorably heard. In 2012, for example, a record 53.6 percent of suits were brought in multiple states. In that year, the average deal generated five lawsuits.
Delaware was left to struggle with huge amounts of litigation and pressure to decide cases for the plaintiffs, or risk losing these cases to other states.
A series of changes, though, has overhauled this landscape.
The first was a move to limit multijurisdictional litigation. Starting in 2010, after a favorable opinion in a Delaware court, companies began to adopt forum selection clauses in their bylaws. These clauses sought to end the game of plaintiffs' lawyers choosing the most favorable state to file suit by requiring that cases be litigated in Delaware instead of a company's home state.
When these clauses were validated by the Delaware courts in 2012, they became virtually ubiquitous. More than 1,000 companies have adopted these clauses.
The effects are now clear. According to our new study, multijurisdictional litigation occurred in 23.4 percent of the deals in 2014, down roughly half since 2012. This is probably a result of the forum selection clauses.
This is not to say that multijurisdictional litigation is over. Not all companies will adopt these clauses. In addition, companies may use it to their advantage, allowing a case to go forward in a jurisdiction where they think they can get a more favorable settlement. This is permitted under the terms of these clauses, which allow the company to waive the requirement.
This appeared to happen last year, when FX Energy chose not to enforce a forum selection bylaw providing for litigation in Utah and instead let litigation proceed in Nevada, presumably because of the higher likelihood of a more favorable settlement.
The decline of multijurisdictional litigation has provided Delaware courts more room to reject cases without fear that they would simply be brought in other states.
This led to Delaware's sharp turn against disclosure-only settlements in takeover litigation, in which the only requirement is for the target to disclose more information about the sale. These agreements have traditionally constituted 80 percent of merger litigation settlements.
But they do raise skepticism because they result in fees for the plaintiffs' lawyers but a questionable benefit for shareholders. After all, the disclosure may not do anything or be significant.
In 2015, three professors (including myself) published a paper looking at disclosure-only settlements. We found little evidence of value in these settlements as shareholders did not change their votes on any such settlement or information disclosure.
In May 2015, after publication of this paper, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery refused to approve a settlement with disclosure components in litigation over Cobham's acquisition of Aeroflex.
In September 2015, things came to a head in the Riverbed Technology shareholder litigation when Sean J. Griffith of Fordham University's School of Law filed an objection to a disclosure-only settlement.
Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery approved a settlement in the Riverbed case and a lawyers' award of $329,881.61, reduced from a requested $500,000. But in the opinion granting this approval, the judge stated that the court would no longer play by the same rules or be willing to award lawyers' fees in these settlements. This was the turning point.
After the Riverbed opinion, the new study found, litigation rates declined in the last quarter of 2015 to 21.4 percent of all deals. Lawyers were simply unwilling to bring these cases, knowing that the judges would reject them. And because of forum selection clauses, the lawyers could not go to another state to try to get a better decision. Even pending litigation was withdrawn in at least four cases, as the new study documents.
This trend is likely to continue this year. The net effect of this downturn will be to drive many of the smaller law firms out of this business, presumably into new ventures. On Friday, the Delaware Court of Chancery said in a ruling in the case involving the buyout of Trulia by Zillow that it was raising the bar for disclosure-only settlements, meaning most of them would no longer go through.
And yet this kind of litigation remains lucrative. Huge awards have been given recently in cases involving deals by Freeport McMoRan, Dole Food and Rural/Metro.
These awards are going to a handful of top firms, like Robbins Geller and Bernstein Litowitz, that specialize in actually litigating cases and not settling them.
So don't expect litigation to go away. This is America, after all. Instead, it will simply be a world of riches for a small few and a desert for the rest.