During last week's PLUS D&O Symposium, several of the
panels discussed the problems surrounding the current onslaught of
M&A-related litigation - and appropriately so, as the surging levels of
M&A litigation is one
of the most distinct and troubling current litigation trends. During the
course of the discussion at the conference, several of the speakers referenced
developments, materials and statistics. I thought it might be useful to
assemble these various references in one site. (I have linked to some of these
resources in prior posts on this site.)
First, though, by way of background about M&A-related
litigation developments, I thought it might be useful to reference and to link
to a recent paper that provides a good introductory explanation of what the
M&A-related litigation is all about. In a February 6, 2012 paper entitled
"Anatomy of a Merger Litigation" (here),
Clark of the Wilson Sonsini law firm and Marcia Kramer Mayer of NERA
Economic Consulting walk through the litigation developments surrounding a
single merger transaction, by way of illustration and as a vehicle to discuss
and consider a variety of aggregate statistics regarding merger litigation. The
paper provides a useful starting point for understanding the current
M&A-related litigation phenomenon. NERA's related statistical analysis of
M&A litigation can be found here.
With respect to the conference panels, I am sure that
many attendees were as struck as I was by the statement of Stanford Law School
Klausner that if you take state court M&A-related litigation into
account, then corporate and securities litigation filings are at "an all-time
high." I have in fact made
the same point myself, but it just has so much more credibility coming from
Professor Klausner. In making these statements, Professor Klausner was
referring (with respect to the state court M&A litigation) to the recent
Cornerstone Research paper entitled "Recent Developments in Shareholder Litigation
Involving Mergers and Acquisitions" (here).
In connection with the initial panel discussion of these
litigation statistics, John Spiegel of the Munger Tolles law firm referred to a
recent paper by Ohio State University Professor Steven Davidoff and Notre Dame
University Finance Professor Matthew Cain. The January 1, 2012 paper, entitled
"A Great Game: The Dynamics of State Competition and Litigation" can be found here. (I
discussed Professors Davidoff and Cain's paper in a prior post, here.)
Among the many issues discussed relating to the
M&A-related litigation were the problems associated with multiple suits
pending in separate jurisdictions relating to the same transaction. Among the
suggestions that have been proposed as a way to avert the problems associated
with multi-jurisdiction litigation and to discourage plaintiffs from forum
shopping is the adoption by companies of a by-law amendment designating
Delaware as the sole forum for all corporate and securities litigation. This
suggestion has attracted a great deal of interest and a number of companies
have adopted by-law amendments designating Delaware as the sole forum for
corporate and securities litigation.
As several of the panelists mentioned during the
conference, certain plaintiffs' lawyers have now launched a litigation assault
on these by-law amendments. On Monday and Tuesday this past week, the lawyers
filed at least nine complaints against companies that had adopted these types
of by-law amendments. Nate Raymond's February 8, 2012 Am Law Litigation
Daily article discussing the suits can be found here.
Alison Frankel's February 8, 2012 article on Thomson Reuters News &
Insight about the cases can be found here.
Francis Pileggi's February 7, 2012 post about the cases on his Delaware
Corporate and Commercial Litigation blog can be found here.
The nine companies targeted in the suits are: Chevron;
Priceline.com; AutoNation; Curtiss-Wright; Danaher Corporation; Franklin
Resources; Navistar International; SPX Corporation: and Superior Energy
Services. An example of one of the complaints, which are substantially the
same, can be found here.
The plaintiffs complain that the by-law applies to broad
categories of kinds of litigation, is not limited just to derivative or class
litigation, and applies to individual claims. But while the shareholders are
required by the by-laws to bring their claims in Delaware, the bylaws provide
no forum restrictions on the corporations themselves. The plaintiffs also
complain that the bylaws seemingly require claim to be brought in Delaware even
where there may not be personal jurisdiction over prospective defendants (for
example, in connection with claims against individual directors and officers).
The plaintiffs in these suits seek a judicial declaration
that the by-laws are invalid. The interesting attribute of the by-laws in
dispute is that in each case, the by-laws were adopted by board action and not
put to shareholder vote. So even if these particular board adopted by-laws are
struck down, the cases may not address the question of whether a forum
selection by-law that has been adopted by shareholder vote can be enforced (for
example, on former shareholders, or even where there is no personal
jurisdiction over prospective defendants).
It is worth noting that in the only judicial decision to
date to consider a forum selection by-law, the by-law was found to be
unenforceable. As discussed here
(scroll down), in January 2011, Northern District of California Judge Richard
Seeborg found Oracle's forum selection by-law to be unenforceable, in part
because it had not been put to shareholder vote. Because Seeborg was applying
federal common law rather than Delaware law, his ruling may have only limited
impact on the Delaware proceedings.
At least one member of the Delaware Chancery Court has
voiced his approval at least of the concept of a forum selection by law; in the
Revlon Shareholders' Litigation, the Delaware Court of Chancery suggested
that corporations organized under Delaware law are "free" to adopt
"charter provisions selecting an exclusive forum or inter-entity
disputes." In the wake of this suggestion, many lawyers
began to recommend that their client companies adopt charter provisions
designating the Delaware Court of Chancery as the preferred forum. The newly
filed litigation may provide guidance on this important issue.
Finally, if you have not yet checked it out, the PLUS
Blog has a number of video
highlights from the PLUS D&O Symposium, including among other things an
interview with yours truly.
Another FDIC Failed Bank Lawsuit:
Another topic of discussion at the PLUS D&O Symposium was the growing wave
of FDIC litigation against former directors and officers of failed banks. On
Thursday, February 9, 2012, the FDIC filed its latest lawsuit in the District
of Nevada, against four former officers of the failed Silver State Bank of
Henderson, Nevada. The FDIC's complaint can be found here.
The lawsuit is the 22nd that the FDIC has
brought as part of the current bank wave. Interestingly, this complaint was
brought well over three years after the September
2008 failure of Silver State Bank. Informed sources advise that the parties
had entered a tolling agreement. A February 10, 2012 Las Vegas Review-Journal
article discussing the new suit can be found here.
A Preview of Warren Buffett's Annual Letter
to Shareholders: Berkshire Hathaway's 2011 annual report will
not be published for a few more weeks yet. But readers interested in a preview
of Warren Buffet's annual letter to Berkshire shareholders, which is the
highlight of the company's annual report, may want to take a few minutes to
review an excerpt of the forthcoming letter that was published on February 9,
2012 in a blog on the CNN Money website (refer here).
The basic thrust of the excerpt is that due to the impact of inflation and
taxation, stocks outperform bonds and gold. The interesting excerpt is vintage
"Investing," Buffett writes, "is forgoing consumption now
in order to have the ability to consume more at a later date." Real risk
then is not volatility, but the possibility that your investment will lose
purchasing power -- that is, that you will actually only be able to consume less
later. Investments denominated in currentcy, such as bonds or money market
funds, though often charactized as "safe" lose value due to the
"inflation tax," not to mention actual taxes. Buffet says,
"right now, bonds should come with a warning label." .
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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