In a prior post (here),
I examined the mounting problems associated with the increasing levels of
M&A-related litigation. A recent academic paper takes a closer look at
these issues and concluded, among other things, that M&A-related lawsuit
filings now outnumber federal securities class action lawsuit filings, and
M&A-related litigation has "replaced traditional stock drop cases as the
lawsuit of choice for plaintiffs' securities lawyers."
In her article entitled "Securities Class Action Lawsuits
in State Court" (here),
Lewis & Clark Law School Professor Jennifer Johnson
examines a database of class actions filed in state court between 1996 and
2010. Her analysis shows that as a result of several Congressional enactments
in recent years - particularly SLUSA and CAFA - the prevalence of many types of
state court securities class action filings has declined. However, the number
of state court class action lawsuit filings involving M&A transactions has
been "skyrocketing" and now even outnumber federal securities class action
Indeed given that the database of state court filings on
which Professor Johnson relied almost certainly understates the number of state
court filings, it is probable that the number by which the state court
M&A-filings exceeds the number of federal court filings is even greater
than her analysis shows.
According to Professor Johnson, the growth of
M&A-related litigation is a consequence of the various Congressional
enactments intended to restrict traditional securities class action lawsuits to
federal court. As legislative enactments like SLUSA and CAFA drove plaintiffs'
lawyers away from federal court, "dispossessed plaintiffs' lawyers increasingly
have turned to filing alternative class actions in state court" - particularly
M&A-related class actions. As a result, M&A-related class action
lawsuits "have replaced traditional stock drop cases as the lawsuit of choice
for plaintiffs securities lawyers," particularly because the cases are filed
and resolved quickly, owing to the pressure on the defense attorneys' to
complete the underlying transaction.
While the increased numbers of M&A-related lawsuits
has led to an increase in the numbers of filings in Delaware state court, "the
relative percentage of Delaware cases compared to those in other jurisdictions
has fallen." Increasingly, plaintiffs' lawyers are choosing to file cases
outside the defendants' state of incorporation. At the same time, while the
growth in M&A-related litigation has primarily been a state-court
phenomenon, there have also been growing numbers of federal court M&A
related lawsuit filings as well.
The proliferation of M&A-related litigation outside
of Delaware is in part due to the fact that increasingly any one M&A event
is likely to "induce multiple filings." During 2010, for example, each M&A
event spurred an average of 1.8 filings, but this statistic is "slightly
misleading" as larger entities often faced suits in 4 or 5 different
The reasons for increase in M&A-related filings
outside of Delaware may include concerns among plaintiffs' attorneys that
Delaware's courts are "increasingly diligent in policing the conduct of lead
counsel and the award of attorneys' fees." There may also be a perception that
Delaware is a "manager-friendly state" and that "settlement values may be
higher outside of Delaware state court."
The growing levels of multi-jurisdiction litigation
"makes it difficult for courts to manage cases, as there is no prescribed
orderly procedure for consolidation as would exist in the federal courts."
There are also no mechanisms for coordination between states or between state
and federal courts. The phenomenon of multi-jurisdiction M&A
litigation "wastes judicial resources," leads to "obvious inefficiencies and
increased costs" for defendants, and even leads to problems among plaintiffs'
counsel "as they jockey for position and ultimately for fees."
Johnson observes that "effective coordination" between
the courts could help ameliorate these difficulties. She also reviews various
proposals that have been offered for corporations to amend their charters to
include clauses specifying the forum for specifying intra-corporate disputes.
But, she also speculates, "absent a major change," the concerns associated with
the proliferation of multi-jurisdiction M&A related litigation "is likely
to come to the attention of Congress."
Johnson suggests that Congress might attempt to address
these concerns through an outright repeal of the so-called "Delaware Carve-Out"
from SLUSA, which preserves state court jurisdiction for state law claims
involving shareholder communications involving voting rights, such as in
M&A transactions, forcing the class actions into federal court.
Alternatively, Congress might revisit SLUSA and restrict the carve-out to
preserve state court jurisdiction for the courts of an entity's state of
jurisdiction (which, Johnson speculates, would have the effect of making
Delaware the sole forum for the majority of cases).
Johnson's article further substantiates the alarms being
sounded in connection with the exploding levels of M&A-related litigation.
The growth of M&A-related litigation is a vexing and costly problem, and
her article helps to substantiate the growth and seriousness of the problem.
However, her speculation about possible solutions may be optimistic. The
inability of the current Congress to confront even matters of the greatest
urgency is hardly reassuring about its ability to deal with issues of the type
But even Congress were to address these issues, I am
skeptical that Congress would outright eliminate the Delaware Carve Out from
SLUSA and make all corporate litigation into federal litigation. It is
relatively likelier that Congress might be willing to revise the carve-out to
restrict the preserved jurisdiction to the court of the state of an entity's
incorporation, but even there I have my doubts that Congress would be willing
to act in a way that would so clearly favor the courts of a single
Even if we assume for the sake of discussion that
Congress will eventually be able to address these issues, that action could
well be a long time coming. In the meantime, courts and litigants face a
growing and costly problem. Courts and litigants alike will have to continue to
grapple with these problems. Absent a congressional directive, informal
cooperation between and among the courts and parties involved will be the only
practicable solution available - a solution that admittedly could be frustrated
in any specific case by a recalcitrant party or court.
Setting aside the questions of what to do about it, it is
important simply to recognize that the problems associated with the growing
levels of M&A-related litigation activity exist. As Johnson's article
documents, corporate and securities litigation overall is changing. It is no
longer sufficient to focus just on federal securities class action litigation.
M&A related litigation is an increasingly important part of the overall mix
of corporate and securities litigation. For anyone whose tasks include
understanding the risks and exposures associated with corporate and securities
litigation, this is an important development with significant
Special thanks to a loyal reader for forwarding a copy of
other items of interest from the world of directors & officers liability,
with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
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