STEMMING THE TIDE: DELAWARE’S COURTS AND LEGISLATURE TAKE AIM AT DEAL LITIGATION
For the better part of a decade, mergers and acquisitions (M&A) involving publicly-traded Delaware entities have been plagued by over-exuberant litigators exploiting well-meaning law. Shareholder suits hit their peak in recent years, with shareholders challenging more than 93 percent of deals valued at over $100m during each of the years 2011 through 2014.
Through the first half of 2016, however, in the wake of shifts in several areas of Delaware law, Delaware entities have been the beneficiaries of a precipitous drop in shareholder challenges. Thus far, the total number of deals subject to shareholder litigation has fallen by more than 57 percent from the first half of 2015, and even deals valued at over $100m have enjoyed a nearly 25 percent reduction.
This follows a more modest decline in 2015, which was the first year since 2009 that saw fewer than 90 percent of M&A deals valued over $100m challenged by shareholders. Mercifully, the most recent decisions of the Delaware courts and actions by the Delaware legislature seem to show a recognition that the previous mechanics were too susceptible to perverse profiteering, and may indicate a willingness to pave the way for deals down the road.
Spurred by several questionable incentives – including attorneys’ fees in cases seeking mere supplemental disclosures and statutory interest in appraisal arbitrage trials – activist shareholders and the plaintiffs’ bar have run rampant against robust post-Great Recession M&A. With the costs of litigation so low and the returns almost guaranteed, Delaware entities have taken it as a given that any M&A deal they may consummate will be affected by litigation. Indeed, such challenges have become so commonplace that the expected cost of a lawsuit is often included in the deal price, with both sides acknowledging that the lure of litigation is simply too great. For many years the Delaware courts and legislature had stood their ground, reluctant to disrupt the status quo. Recently, though, both have responded.
Oct-Dec 2016 Issue
McDermott Will & Emery LLP