There seems to be a general consensus that the amount of
M&A-related litigation is increasing. The question of how to quantify the
increase has attracted quite a bit of attention lately. In a recent
post, I previewed a forthcoming report from Cornerstone Research that will
provide detailed statistic analysis of the M&A litigation phenomenon.
My post attracted considerable commentary, and also drew
a communication from NERA Economic
Consulting, which has released its own statistical analysis of
M&A-related litigation, and which they shared with me.
In addition, this week I separately received from Ohio
State University Law Professor Steven Davidoff a
copy of the January 1, 2012 paper that he and Notre Dame Finance Professor Matthew Cain
have written entitled "A Great Game: The Dynamics of State Competition and
Litigation" (here), in
which they analyze M&A related Litigation from 2005-2010., with particular
attention to the question of whether or not there is now competition between
the states for this type of corporate litigation. Davidoff should be familiar
to many readers as The Deal Professor
from the New York Times Dealbook blog.
These two reports add substantial additional quantitative
and analytic support for the general observations surrounding the growth in
M&A-related litigation. Both of these reports corroborate the explosive
growth in M&A-related litigation in recent years. I examine both of these
reports below, starting first with Professors Davidoff and Cain's analysis.
Professors Davidoff and Cain's Paper
The Professors' primary interests relate to the question
of whether or not the states are competing for corporate litigation. Their
interest in this question is driven in part by recent analyses suggesting that
Delaware may be losing "market share" for this type of litigation. In order to
determine how "both attorneys and courts interact in this game," the authors
examine state court merger litigation. The authors analyzed 955 merger
transactions that took place between 2005 and 2010 and having a transaction
value great than $100 million.
The authors found that 49.7 percent of transactions
during that period attracted at least one shareholder lawsuit, and that the litigation
rate increased "sharply" during the period, with only 38.7 percent of the
transactions incurring litigation in 2005, compared to 84.2 percent in 2010. In
addition, merger transactions increasingly are attracting multiple lawsuits. In
2005, only 8.6 percent of the deals attracted litigation in more than one
jurisdiction, compared to 46.5 percent in 2010.
The authors found that during the sample period, 69.8
percent of cases settled, while 30.2 percent were dismissed. Only 4.9 percent
of the settlements involved in increased in the amount of the transaction
consideration, while 52.1 percent of the settlements involved only the
disclosure of additional information. The average plaintiffs' attorneys' fee
for settled suits is $1.4 million. Cases that settled for additional disclosure
only pay the lowest level of attorneys' fees (average attorneys fees of
$793) while settlements involving an increase in the deal consideration
pay the most (average attorneys fees $8.5 million)
The authors used this information to calculate an
expected dismissal and attorneys' fee baseline, as a way to measure
"unexplained" dismissal rates and attorneys fees. The authors used these
unexplained amounts as an "indicator for state competition." The authors found
significant variation across states, with certain states awarding higher fees
than others. Delaware awarded fees $400,000 to $500,000 higher while dismissing
a greater portion of cases than other states.
The authors found some statistical support for the claims
that Delaware is losing the state court litigation competition, but they also
found that "the game" is complex and that the dynamic varies depending on which
states are compared. The authors also found evidence that Delaware's courts are
responsive to this competition, concluding that Delaware's courts award" higher
attorneys' fees to compensate for a higher dismissal rate," and adjust
"dismissal rates down when it loses prior cases to other jurisdictions." The
authors cite the recent $300 million award in the Southern Peru Copper case as
an indication that Delaware is" competing more overtly in this game."
The NERA Economic Consulting Presentation
In a December 6, 2011 presentation done in conjunction
with the Wilson Sonsini law
firm and entitled "Merger Objection Litigation" (here),
NERA provided a detailed statistical review of M&A-related litigation. The
NERA study is based on the firm's examination of the 731 merger transactions it
identified as having been announced between 2006 and 2010 and that were
completed by February 28, 2011, and that had a value equal to or greater than
$100 million. NERA found that 285 of those transactions were challenged in a
state or federal lawsuit, through June 20, 2011. NERA also found that
litigation settlements had been reached in connection with 162 of the deals.
The NERA study found that while there were fewer deals
overall in the last three years of the 2006-2010 study period, the incidence of
M&A related litigation escalated significantly in those three later years.
Thus, while only 26.1% of the 2006 deals and only 21.9% of the 2007 deals attracted
litigation, 45.4% of the 2008 deals, 78.6% of the 2009 deals, and 60.7% of the
2010 deals attracted litigation. Though the 2010 figure represent a slight
decline from the prior year, the 2010 level of litigation still represents a
significant increase compared to the earlier years in the study period.
The NERA study also found that throughout the 2006-2010
period, the litigation rate increased as the size of the deal increased. Thus,
only about 25% of the deals under $500 million attracted litigation, but 38.7%
of the deals between $500-$999 million, 40.8% of the deals between $1 billion
and $1.9 billion, 53.0% of the deals between $2 billion and $4.9 billion and
70.1% of the deals equal to or greater than $5 billion attracted litigation.
Merger objection litigation can be expected to arise
fairly quickly after the deal is announced. The NERA study shows that a third
of the litigation arrives in the first two days after the deal is announced and
about 60% arrived in the first week. 81% of the merger litigation arrives
within the first thirty days after the deal is announced. Although the takeover
target is consistently named as a defendant in this litigation, 70% of the time
the named defendants also include the acquirer.
The vast majority of the litigation is filed in state
court only. 83% of the deals that were litigated attracted only state court
litigation. Another 14% attracted both state and federal litigation. Only three
percent of the deals attracted only federal court litigation.
The NERA study suggests that many of the deals that
attract litigation are attracting litigation outside Delaware. Of the deals
that were litigated, 20% were litigated only in Delaware and another 13% were
litigated in both Delaware and another state. So about one third of the deals
that attracted litigation were litigated at least in part in Delaware. The
remaining two thirds of the deals were litigated only outside Delaware.
However, the presentation does not show how many of the deals that were
litigated only outside Delaware involved target companies that were
incorporated in Delaware. The presentation also does not show whether or not
the prevalence of litigation outside Delaware changed during the 2006-2010
With respect to the M&A-related lawsuits in the study
period that had settled, the NERA report found that the vast majority of the
settlements involved cash payments of less than $1 million. 106 of the 154
settlements in the settlement analysis (nearly 69%) settled for less than $1
million. Another 33 out of the 154 in the settlement analysis settled for less
than $10 million. Only 15 of the 154 settlements in the analysis settled for
amounts of $10 million or greater, including only 4 with settlements between
$100 million and only one with a settlement greater than $1 billion. (The NERA
presentation includes a detailed list of the largest settlements at slide 19.)
Thus, while the settlement period included a few very
large settlements, the vast majority of the settlements were for less than $10
million, and more than two-thirds were below $1 million.
In fully 87% of the litigated deals that had settled, the
only beneficiary from the monetary settlement was the plaintiffs' attorneys. In
only 9% of the settlements did the beneficiaries include both the plaintiffs'
attorneys and class members. Thus the vast majority of monetary settlements pay
only for the plaintiffs' attorneys' fees and expense, and the "benefits" to the
class, although occasionally monetary, more often take another form, such as reduced
target company termination fee; fuller disclosure; or improved corporate
The information in these two studies provides valuable
additional perspective on the increasingly important M&A-related litigation
phenomenon. The two studies corroborate that in creasing numbers of M&A
transactions are attracting litigation. The NERA data also provides some
interesting additional information that has not been a part of other
statistical perspectives on this litigation phenomenon, including in particular
the data showing how quickly the lawsuits arrive and the information showing
the range of settlement outcomes.
The Professors' report provides additional information
about the increasing prevalence of multi-jurisdiction litigation, as well as
average attorneys' fees and dismissal rates. Perhaps most significantly, the
Professors' study provides important insight into the question of state
competition for corporate litigation.
The data in these studies are directionally consistent
with the previously released studies, including the information I previewed in
a recent post about the forthcoming Cornerstone Research report. They are also
directionally consistent with each other, while differing somewhat in their
details. The two reports also differ somewhat from the Cornerstone Research
data I previously reviewed. (The Cornerstone Research analysis suggests a
higher litigation rate both in 2007 and in 2010 than the analysis in either of
the two studies discussed above, although all three of the analyses agree that
that the litigation rate increased between 2007 and 2010.)
The difference between the analyses may be attributable
to the differing data sources used in the studies. There may have been
methodological differences as well. For those of use who are studying and
trying to understand the growing M&A-related litigation phenomenon, it will
be important to understand these differences. We can certainly hope as the
various research sources release their analyses that they will help the rest of
us understand not only where their data came from and how it was analyzed, but
how the approach they used may differ from other analyses that have been
In any event, no matter how you slice it, the level of
M&A related litigation is growing. The defense expenses and settlement
amounts associated with this litigation represent a growing problem as well.
All signs are that this phenomenon will remain a significant part of the
corporate and securities litigation landscape for the foreseeable future. For
that reason it will remain important to understand what this litigation means.
The willingness of NERA and of the Professors to share their analysis is
extraordinarily helpful in that regard. Along those lines, I would like to
express my deep thanks here to NERA and to Professor Davidoff for their
willingness to share their presentations with me.
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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