By, Barbara Becker, Esq., Partner in the New York office of Gibson, Dunn & Crutcher and Co-Chair of the firm's M&A Practice Group; Stephen Glover, Esq., Partner in the Washington, D.C. office of Gibson, Dunn & Crutcher and Co-Chair of the Firm's M&A Practice; and Daniel Alterbaum, Esq., an Associate in the New York office of Gibson, Dunn & Crutcher.
Recent court decisions reflect a significant shift in the treatment of the so-called “merger tax”--lawsuits filed by stockholders following the public announcement of a transaction alleging that the target’s directors breached their fiduciary duties by agreeing to sell for an unfair price.
Many such lawsuits would settle early in the litigation on a “disclosure-only” basis where the plaintiff agrees to make additional disclosures and cover the fees of the plaintiffs’ counsel up to a cap.
The frequency of such lawsuits rose dramatically from 2005 to 2014 before sharply declining. One study found that the litigation rate remained consistently above 90% from 2011 to 2014 and that lawsuits were common across deal size as well.
A follow-up study from August 2016 found that M&A transactions valued over $100 million that were the subject of litigation had declined to 64%--the first time such percentage had declined below 90% since 2009.
The drop reflects recent developments suggesting courts in Delaware and other jurisdictions have grown skeptical of “disclosure-only” settlement agreements.
The Delaware Chancery Court issued its landmark decision in In re Trulia, Inc. Stockholder Litigation, wherein the Court rejected a proposed “disclosure-only” settlement. The Court signaled its intent in the future to be increasingly vigilant in reviewing such settlements.
In particular, the Court explained that a disclosure settlement agreement should address a “plainly material misrepresentation or omission.”
The Trulia decision has been cited favorably by state and federal courts in California, Connecticut, Illinois, New Jersey, North Carolina, and Texas.
Notably, in February 2017, in Gordon v. Verizon Communications, Inc., an appellate court in New York announced a different approach in reversing a lower court’s rejection of a “disclosure-only” settlement agreement.
The Gordon court found that the proposed settlement agreement was in the best interests of each of the putative class of plaintiff-stockholders and the corporation because the incremental disclosures were “of some benefit” to the stockholders.
Later decisions from other New York courts have viewed the decision in Gordon as an outright rejection of Trulia’s ‘plainly material’ standard.
As it remains to be seen whether Trulia or Gordon will become the prevailing standard for reviewing “disclosure-only” settlements, Corporations interested in forestalling M&A litigation may wish to consider forum selection bylaws that select jurisdictions with a favorable view of Trulia.