The Delaware Supreme Court issued a
ruling on December 14, 2017 that endorsed its interpretation of the "Efficient
Market Hypothesis" as a foundation for relying upon market pricing
to define a company’s “fair value” in appraisal proceedings. The
Forum accordingly reported that it would resume
support of marketplace processes instead of judicial appraisal
for its participants' realization of intrinsic value in
opportunistically priced but carefully negotiated buyouts. See:
These days, you can be sure that when a company announces it is being
acquired, it will also be sued by a bevy of plaintiffs’ lawyers.
Merger litigation is a big issue in Delaware, and it reached a record
rate last year. According to a new study that I prepared along with
Matthew D. Cain, 97.5 percent of takeovers in 2013 with a value over
$100 million experienced a shareholder lawsuit. This is even higher
than the final figure in 2012 of 91.7 percent of transactions. And it
is up from the rate in 2005, when only 39.3 percent of transactions
attracted a lawsuit.
is not just that merger litigation has become ubiquitous. There are
more plaintiffs and law firms getting into the business. The average
takeover valued greater than $100 million last year had seven
lawsuits. Each of these roughly represents a different law firm. This
is up from 2012, when the average was five lawsuits and triple the
rate in 2005, which had 2.2 suits per transaction.
Despite the aggregate increase in the number of suits, litigation
brought in more than one state decreased. In 2013, 41.6 percent of
transactions with litigation had litigation in multiple states, down
from 51.8 percent in 2012. If the trend continues, it is likely to be
seen by some as good because multijurisdictional litigation raises the
issue of plaintiffs’ lawyers trying to manipulate the system by going
to the court where they will get the best treatment.
what happened to all of this litigation?
Settlement information is still preliminary because many of these
cases are making their way through the courts, but more than 70
percent have settled so far. Nearly 85 percent of the settlements —
about the same rate as the 85.7 percent in 2012 — were disclosure
only, which typically result in an amendment to the company’s proxy
statement to provide additional disclosure to shareholders.
Shareholders are not paid any amount in this settlement, but the
plaintiffs’ lawyers are paid fees awarded by the court.
Because of this, disclosure-only settlements have been criticized for
being “cheap” settlements that benefit only plaintiffs’ lawyers and
only further encourage litigation without merit. And given that the
vast majority of these settlements are disclosure only, this
reinforces the critics. Defenders of this litigation say it pays for
the better cases like the litigation over the Southern Peru buyout,
which ended with a $2.3 billion judgment, and most recently, the
litigation over Kinder Morgan’s acquisition of the El Paso
Corporation, which ended in a settlement for shareholders totaling
$110 million. After all, plaintiffs’ lawyers argue, these lawsuits
must be brought in a wide variety of cases to conduct discovery and
find the bad apples. There is also the unquantifiable benefit that
companies are on their best behavior because they know they will be
sued if they are not.
While the courts in Delaware have been quick to award big fees where
there is wrongdoing, the judges are clearly tiring of disclosure-only
settlements. Last year, in a number of cases, including the case In re
Paetec Holding Corporation, Delaware judges have pushed back by
scrutinizing disclosure-only settlements for the real value they
provide to shareholders. In the Paetec ruling, Vice Chancellor Sam
Glasscock III stated that these settlements might be the subject of
collusion and that the risk is that defendants and plaintiffs have
agreed to “trivial disclosures as the path of least resistance to a
desired end.” He recommended that the court scrutinize disclosure-only
settlements. Even so, Vice Chancellor Glasscock awarded a lawyers’ fee
of $500,000 for the disclosure-only settlement in the case.
another matter this past year, In re Gen-Probe, Vice Chancellor J.
Travis Laster raised questions about the high lawyers’ fees in
disclosure-only settlements and awarded only $100,000. The vice
chancellor also expressed concern over the growth of this litigation.
He stated that there might need to be a “recalibrating” of the idea
that the court was going to give out “left and right, 500 grand for”
relatively meritless disclosure-only settlements.
Lawyers’ fees awarded in litigation settlements were $485,000 per case
in 2013, compared with $500,000 the year before. And in line with the
growing sentiment against these cases and disclosure-only settlements,
median fees were at the lowest average levels since we began tracking
the data in 2005.
what does this mean for corporate America? Many of these lawsuits have
no merit, but there are a number of suits that do address real
wrongdoing and should be encouraged. But any change may be a long way
off. The current system benefits plaintiffs’ lawyers but also defense
lawyers who earn quite a bit defending these cases. It is also a boon
to buyers, who are no longer liable for future claims from
shareholders. This is not a bad insurance policy for $500,000 or so.
still remains to be determined whether the vast majority of this
litigation and, in particular, disclosure-only settlements, benefit
shareholders. The debate continues, but absent radical change so
undoubtedly will the litigation.
Steven M. Davidoff, a
professor at the Michael E. Moritz College of Law at Ohio State
University, is the author of “Gods at War: Shotgun Takeovers,
Government by Deal and the Private Equity Implosion.” E-mail:
firstname.lastname@example.org| Twitter: @StevenDavidoff
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