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Research concludes M&A class actions produce no benefits, courts and investors should rely upon appraisal rights

 

The paper summarized below concludes that the current practice of class action M&A litigation produces no benefits to investors and proposes policies to discourage it, presenting the following view supporting court and investor reliance upon the alternative of appraisal rights (see page 43, February 1, 2014, Steven M. Davidoff of Ohio State University, Jill E. Fisch of University of Pennsylvania and Sean J. Griffith of Fordham University: "Confronting the Peppercorn Settlement in Merger Litigation: An Empirical Analysis and a Proposal for Reform"):

To the extent our proposal generates a shift to appraisal proceedings, we would view that shift as an unmitigated benefit for two reasons. First, the Delaware courts are expert in valuation methodology and continue to refine the appraisal proceeding to modernize the mechanism for shareholders to challenge merger price. Second, appraisal focuses directly on the issue that is most central to a merger challenge – are shareholders receiving fair value for their stock? At the end of the day, whatever disclosure or process issues are involved, the primary issue from a shareholder perspective is the merger price.[212] By focusing exclusively on that question, we view appraisal as the optimal method for providing shareholders with redress. Indeed, as the Delaware courts have explained, the appraisal proceeding may provide shareholders with a better remedy than the standard fiduciary duty claim if the true concern is merger consideration because an appraisal proceeding requires a judicial determination of “fair value: while a court will reject a fiduciary duty claim so long as the merger price is within “the range of fairness.”[213] The difference is illustrated by the Cede v. Technicolor litigation in which the court determined, in ruling on a breach of fiduciary duty claim that the merger consideration of $23/share was fair,[214] yet, in an appraisal proceeding, awarded the plaintiffs $28.41/share.[215] Accordingly, we view the appraisal proceeding as creating appropriate litigation incentives for both shareholders and their counsel to bring challenges if and only if they have a reasonable chance of recovering additional consideration.


[212] Cf. In re Trados Inc. Shareholder Litig., 73 A.3d 17 (Del. Ch. 2013) (finding no breach of fiduciary duty where merger price was determined to be fair).

[213] See Trados, 73 A.3d at 78.

[214] Cinerama, Inc. v. Technicolor, Inc. (Technicolor III), 663 A.2d 1156 (Del. 1995).

[215] Cede & Co. v. Technicolor, Inc., 884 A.2d 26, 30 (Del. 2005).

Note: The legal foundations of the Trados and Technicolor litigation cited above were presented on page 4 of the September 9, 2013, Jeremy D. Anderson, Erin C. E. Battersby and José P. Sierra of Fish & Richardson P.C., memorandum to Dell Valuation Trust: Delaware Appraisal of Fair Value for Standalone Buyouts, and the subsequently published version, September 10, 2013, Jeremy D. Anderson and José P. Sierra of Fish & Richardson P.C. in Law360: "Unlocking Intrinsic Value Through Appraisal Rights."

 

Source: The Harvard Law School Forum on Corporate Governance and Financial Regulation, March 14, 2014 posting

 

Posted by Steven Davidoff, Ohio State University College of Law, Jill Fisch, University of Pennsylvania, and Sean Griffith, Fordham University, on Friday March 14, 2014 at 9:00 am

Editor’s Note: Steven M. Davidoff is Professor of Law and Finance at Ohio State University College of Law. As of July 2014, Professor Davidoff will be Professor of Law at the University of California, Berkeley School of Law. Jill E. Fisch is Perry Golkin Professor of Law and Co-Director of the Institute for Law & Economics at the University of Pennsylvania Law School. Sean J. Griffith is T.J. Maloney Chair in Business Law at Fordham University School of Law. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

In the US, every M&A deal of any significant size generates litigation. The vast majority of these lawsuits settle, and the vast majority of these settlements are for non-pecuniary relief, most commonly supplemental disclosures in the merger proxy.

The engine that drives this litigation is the concept of “corporate benefit.” Under judge-made law, litigation that produces a corporate benefit allows the court to order plaintiffs’ attorneys’ fees to be paid directly by the defendants provided that the outcome of the litigation is beneficial to the corporation and its shareholders. In a negotiated settlement, plaintiffs will characterize supplemental disclosures in the merger proxy as producing a corporate benefit, and defendants will typically not oppose the characterization, as they are happy to pay off the plaintiffs’ lawyers and get on with the deal. The supposed benefits of these settlements thus are rarely tested in adversarial proceedings. Knowing this creates a strong incentive for plaintiffs’ attorneys to file claims, put in limited effort, and negotiate a settlement consisting exclusively of corrective disclosures. But is there any real value to these settlements?

Our answer to this question, based on a new empirical study, is no.

In our forthcoming article in the Texas Law Review, Confronting the Peppercorn Settlement in Merger Litigation: An Empirical Analysis and a Proposal for Reform, we study shareholder voting behavior in a hand-collected sample of 453 large public company mergers from 2005-2012. We hypothesize that supplemental disclosures, because they are in effect “compelled” by the settlement, should produce new and unfavorable information about the merger and therefore reduce the percentage of shares voted in favor of the deal. By contrast, amendment settlements—that is, non-pecuniary relief focusing on revisions to the merger agreement, most often the termination fee or other deal protections—should result in a higher percentage of shares voted in favor of the deal.

Our regression analyses find some support for the later hypothesis but no support at all for the former. In short, we find no relationship at all between supplemental disclosures and shareholder voting behavior. Disclosure-only settlements appear to have no effect on shareholder voting.

We also study the relationship between attorney fee awards and voting behavior. Our hypothesis is that, if judges are willing to award higher fees in cases in which the disclosure is most meaningful, those cases should be associated with fewer votes in favor of the merger. This second hypothesis similarly lacks empirical support—there is no relationship between the size of the fee award and shareholder voting behavior. We conclude that shareholder voting fails to provide evidence of a beneficial impact from disclosure-only settlements.

We therefore conclude that courts should reject disclosure-only settlements as a basis for attorney fee awards. We argue that the simplest mechanism for achieving this result would be for courts to stop recognizing supplemental disclosures as a basis for “corporate benefit.” This change would strike directly at the engine that empowers excess litigation activity. In advancing this claim, we argue for strengthening the conceptual separation between state merger law and the federal securities laws. In effect, we maintain that corporate disclosures are and should be policed by the federal securities laws and that state courts should focus on their fundamental role of evaluating the fairness of the merger process and price. We demonstrate how this efficient specialization would redress the problem of excessive and wasteful merger litigation.

The full article is available for download here.

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