The rise in merger objection lawsuits post Trulia
By Miles R. Afsharnik
In our July 2013 advisory, we discussed forum selection clauses adopted by a company's board of directors to deter the rise in corporate governance litigation. Later, in our February 2016 advisory, we highlighted the Delaware Chancery Court’s disapproval of "disclosure-only settlements" in mergers and acquisitions (M&A) related litigation. This advisory provides the latest developments in merger objection lawsuits.
In their most recent study of securities class action cases nationwide, Cornerstone Research and Stanford Law School Class Action Clearinghouse found that there were a record 270 securities class action cases filed in 2016.1 Much of that increase was attributed to the larger number of merger objection lawsuits filed in federal court, where 80 such lawsuits were filed. Plaintiffs' lawyers are also shifting the filing of merger objection lawsuits to state courts after the hostility that the Delaware Chancery Court showed in Trulia.2
Similarly, in the last few years, California state courts have become a new favorite venue for initial public offering (IPO) related litigation as statistics show that dismissal rates for the complaints are much lower than in federal courts. However, California is not alone. A recent decision by a New York state appellate court will make it much easier for disgruntled shareholders to bring merger objection suits in New York instead of Delaware. Gordon v. Verizon Communications, Inc., 2017 WL 442871 (1st Dep't 2017). In Gordon, the New York appellate court approved the settlement of litigation over an acquisition by Verizon Communications and articulated a new test to evaluate the fairness of such settlements. In its decision, the Gordon court developed two new factors in determining the fairness of such merger objection suits:
- Whether the nonmonetary relief in a proposed settlement is in the best interest of all members of the class of shareholders
- Whether the settlement is in the best interest of the corporation
In applying its new test, the Gordon court found that the settlement was fair.
Corporate governance implications
Verizon Communications did not have a forum selection clause in its bylaws, which is why the lawsuit was brought in New York instead of Delaware. Corporations should reexamine whether the adoption of a forum selection clause would be beneficial in reducing merger-related litigation post Trulia.
The Gordon court's new standards are clearly less onerous than those announced in Trulia. Because of this, New York may become a more favorable venue for merger objection lawsuits.
Finally, while Trulia has decreased the number of merger objection suits in Delaware, corporations may now have to litigate instead of paying a small sum to plaintiffs' lawyers as a walk-away cost of doing an M&A transaction. Now, with the more lenient Gordon standard, corporations may decide to opt for litigation in New York for a quick resolution of the litigation.
1. Securities Class Action Filings: 2016 Year in Review (January 31, 2017).
2. As noted in our February 2016 advisory, in Trulia, the Chancery Court denied the approval of a disclosure-only settlement. Importantly, the Court stated that its analysis was not limited to instances where supplemental disclosure is the only nonmonetary consideration from the defendants. In fact, the decision is equally applicable to settlements where supplemental disclosures were the predominant, but not the sole consideration. In re Trulia, Inc. Stockholder Litig., 129 A.3d 884 (Del. Ch. 2016).