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A Win for Our Publicly Traded Clients: A Decline in M&A Disclosure-Only Suits

Oct 27, 2016

Or at least we are hoping this trend continues. This phenomenon we are referring to is the rapid decline in shareholder litigation, stemming from merger and acquisition deals valued at over $100M. The plaintiff’s bar is notorious for finding loopholes in business transactions and spinning those gaps as major damage to shareholders, in this case what is referred to as disclosure-only lawsuits. As is the case in most D&O litigation trends, the outcome is of little or no value to the shareholders but typically creates big windfalls for the law firms bringing the suit. Disclosure-only lawsuits/settlements are no exception. When a company announces a potential merger or acquisition of another company, it must provide detailed information to the shareholders in order to obtain their approval.

The plaintiff’s bar has been filing lawsuits, claiming that the information disclosed is not sufficient to obtain a proper shareholder approval of the merger. However, often the end result is not a monetary benefit to the shareholders, but rather only an award of attorney fees, in many cases, upwards of $500,000. What the shareholders receive is a trivial amount of additional disclosures regarding the deal, often times no more than 800 “new” words added to the proxy.

Up until 2015 and the first half of 2016, litigation was occurring in at least 90% of the deals valued over $100M, with the peak in 2013 of 94% of deals. In 2015 and 2016, that percentage has dipped to 84% and 64%, respectively. This lower rate is being attributed to the impact of the Trulia ruling (Jan. 2016), whereby the Delaware Court of Chancery (DCC) set the standard for settlements in disclosure-only lawsuits to have to prove a “plainly material” theory, or that the information disclosed to shareholders must show a material misrepresentation of the deal.

Since approximately 75% of public companies are incorporated in Delaware, we expect this trend to continue. The factor that remains unknown is if other states will adopt the DCC’s decision or continue to reward the plaintiff’s bar with excessive fees.

Factual highlights from the Trulia ruling (2016 Cornerstone Securities Class Action Filings 2016 Midyear Assessment) include the following:

  • The average number of lawsuits per deal declined from 4.6 in 2014 to 2.9 in 1H 2016.
  • In 2014, 75% of the lawsuits were settled before the deal closed. In 1H 2016, 57% were settled before the deal closed.
  • In 2015, 65% of the M&A litigation was filed in one jurisdiction, 5% of the deals were filed in three or more courts. In 2016, those respective numbers were 57% and 9%.

The takeaway from these statistics, provided by Cornerstone, shows that the DCC has finally taken notice of the imbalance of what benefits shareholders and what benefits the plaintiff’s bar. Let’s see if other states follow.

For more information please contact your Hylant Representative.

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