By Matthew C. Baltay
Shareholder litigation challenging mergers has become so ubiquitous that one observer has remarked that “[i]t’s one of the three inevitables: death, taxes and deal litigation.” Indeed, over 90% of all public company mergers with a value of $100 million or more result in shareholder litigation today. While not as active a forum as Delaware or California for these cases, Massachusetts nevertheless is a top-six contender for merger litigation because of its relatively robust public market base. This article provides an overview of the rise of merger litigation and examines how these cases tend to play out.
The Chances Are
It used to be that the acquisition of a public company, whether by another public company or a private equity group, would generally not result in litigation absent special circumstances such as a hostile takeover or where an unfair deal was being forced on shareholders by insiders who stood to gain. A leading example is the case of Coggins v. New England Patriots Football Club, Inc., 397 Mass. 525 (1986), wherein public shareholders of the Patriots Football Club filed suit after they were cashed out by the majority owner. The court found that the “freeze-out merger” did not serve any valid corporate objective but rather was done solely to further the personal financial interests of the majority shareholder. Historically, approximately one-third of public company acquisitions nationally resulted in litigation.
Beginning in the 2005-2008 period, however, merger litigation exploded. By 2008, the percentage of public company mergers valued at $100 million or more resulting in shareholder litigation had risen to 48% of all deals. By 2010, 84% of such deals resulted in litigation and in 2011, 94.2% of all public company takeovers valued at $100 million or more resulted in shareholder litigation.
Primer on Merger Mechanics
Before delving into the nature of merger litigation, it is useful to review the steps to a successful merger. First, a company decides for whatever reason that it is time to sell, thereby giving rise to the board’s Revlon obligation to secure the best price available.”  Led by its board of directors, the company generally engages in either an auction process seeking bidders or a more targeted search for an appropriate acquirer. Acquirers tend to be other public companies or private equity firms seeking to take the company private. At the end of the process, which may take a half year or more, an appropriate partner is identified and the parties negotiate and ink a merger agreement. Once this is done, usually under the cover of confidentiality, the proposed merger is announced. Public companies do this by filing an announcement and the merger agreement with the Securities and Exchange Commission.
The company’s deal lawyers then draft the proxy statement, which is the document distributed to shareholders in connection with their requested vote on the merger. The proxy statement describes the background of the merger, sets forth the details and mechanics of the merger itself, and provides the fairness opinion of the company’s financial advisor regarding the merger. Generally within weeks of the merger’s announcement, the company files the preliminary proxy statement in draft form with the SEC, thereby affording the SEC the opportunity to comment and request modifications, if any. Several weeks later, the company files the final, definitive proxy statement and mails it to shareholders. The definitive proxy statement sets the meeting date for the shareholder vote on the merger, which usually takes place within a month or so. Assuming the shareholders vote to approve the merger at the shareholder meeting, the deal then closes within a day or two thereafter.
While it used to be the case that this process typically flowed unimpeded by litigation, it is now quite likely that litigation will ensue in the three-month window between announcement of the proposed deal and its anticipated close.
In today’s environment, upon the announcement of a merger, law firms issue press releases and internet posts stating that they are investigating “possible breaches of fiduciary duty and other violations of state law in connection with the sale of the company.” For example, when the acquisition of Massachusetts-based Zoll Medical was announced on March 12, 2012, more than a dozen law firms announced that day that they had “commenced an investigation into possible breaches of fiduciary duty” by the company’s board of directors.
Next, complaints are filed, often within a matter of days of the initial announcement of the deal, by specific shareholders on behalf of the class of all company shareholders. The litigation is brought against the board of directors for alleged breaches of fiduciary duty and against both the selling company itself and the acquirer for aiding and abetting the alleged breaches. The claims are state common law ones filed in state court (with the occasional addition of a federal claim in federal court for the filing of an allegedly materially misleading proxy statement under Section 14(a) of the Securities Exchange Act of 1934).
Complaints tend to allege:
- That the board of directors breached its duties to the shareholders by selling the company for too low a price;
- That the directors failed adequately to shop the company;
- That the directors sold out the shareholders for their own interests, whether in the form of accelerated stock options, golden parachutes or lucrative positions with the acquiring company;
- That the so-called preclusive deal protection terms found in virtually all merger agreements, including termination fees payable to the acquirer if the seller backs out and exclusive no-shop provisions that prohibit the seller from soliciting further offers, are improper; and
- That the disclosures made in the proxy statements regarding the merger were inadequate and materially misleading.
It is rare in merger cases that a single complaint is filed. Instead, multiple complaints are generally filed by different law firms representing different individual shareholders (but on behalf of the same class of company shareholders alleging the same harm). According to a recent Cornerstone study, five separate lawsuits on average are filed in each merger case.” As a further complication, half of all challenged deals result in litigation in more than one jurisdiction, with suits filed in the jurisdiction where the target company is incorporated (such as Delaware, where more than 50% of all public companies are incorporated) and in the jurisdiction in which the company is physically headquartered.”
The Course of the Litigation
After the complaints are filed, merger litigation tends to follow a predictable path. The parties usually agree to consolidate the various cases in each jurisdiction into a single action. In multi-jurisdictional cases, defendants generally move to stay the litigation in all but one forum in order to avoid active litigation on multiple fronts. Because of the deal-related time pressure, plaintiffs then typically move for expedited proceedings, seeking court permission to take expedited discovery and to set a condensed schedule for the briefing and hearing on their anticipated motion to enjoin the merger, all within a several-week period. At this point, defendants face a key decision point: do they settle (and gain some comfort that the deal will close unimpeded) or do they take their chances and fight.
More often than not, defendants make a calculated decision that the surest way to close the deal is to settle, and the most common and economical way to settle is for defendants to make supplemental disclosures. The statistics are that 60% of all merger litigation ends with disclosure settlements (and 95% of settled merger cases involve supplemental disclosures by the company). The Delaware Chancery Court has described this process, and to some degree criticized it, as the “kabuki dance” of merger litigation, wherein a brief, initial “flurry of activity” gives way to a complete cessation of meaningful litigation and, with repeat players in place, “events unfold on cue.” In re Revlon, Inc. Shareholders Litigation, 990 A.2d 940, 945-46 (Del. Ch. 2010) (Laster, V.C.).
The steps are straightforward. Plaintiffs highlight certain disclosure issues that they find most problematic and, as part of a global settlement, the defendants agree to supplement their proxy statement disclosures accordingly. Recent settlements of Massachusetts merger cases have included, for example, supplemental disclosures regarding additional details surrounding the board’s deliberations during the auction process, the strategic alternatives to auction that the board considered, and further explanation of the methodology employed by the company’s financial advisor in reaching its fairness opinion. With supplemental disclosures made, plaintiffs take limited “confirmatory discovery” and agree to dismiss the litigation and defendants agree to pay plaintiffs’ attorneys’ fees, all subject to court approval. Pursuant to the common benefit doctrine, counsel is entitled to an award of fees for securing a class benefit, here enhanced disclosures. Fees in the $400,000 – $500,000 range are common, and fees stretching into the million dollar range are not unheard of.
Additionally, while commentators criticize disclosure-only settlements as draining cash out of the company to pay counsel while providing little benefit to shareholders, there are examples of merger litigation resulting in tangible monetary benefit to the shareholder base. Approximately 5% of settled merger cases involve increased payment to the plaintiff shareholders. The recent Del Monte Foods merger litigation, for example, ended with a payment of $89 million to shareholders.
While the majority of defendants settle merger cases, some opt instead to fight. There are clear risks and costs to this strategy, however. Notably, there is the chance that the court might enjoin the merger or delay it long enough for material adverse events to transpire that could threaten the deal. Nonetheless, defendants have certain opportunities to resist. First, there is plaintiffs’ motion to expedite, which is fought at the outset. If plaintiffs lose, they must go into the motion for preliminary injunction without discovery, thereby decreasing their chances of success. Courts have denied plaintiffs’ motion for expedited proceedings if they view plaintiffs as failing to assert colorable claims and a sufficient possibility of threatened irreparable injury to justify the cost of expedited proceedings. Second, defendants may oppose the motion for preliminary injunction itself by marshaling the facts and law to demonstrate that plaintiffs cannot establish a likelihood of success on the merits.
Approximately one-third of merger cases end by dismissal without settlement as a result of either court order of dismissal or through voluntary dismissal by plaintiffs after losing these motions.
Merger Litigation In Massachusetts
Massachusetts, while not as busy as Delaware or California in terms of volume of deal litigation, is nevertheless one of the more active jurisdictions in the country by virtue of having a disproportionately large number of public companies located in the state. Indeed, Massachusetts is the sixth most active state in terms of deal litigation, behind only Delaware, California, Texas, New York and Pennsylvania.
One can discern three general trends with regard to treatment of merger cases by the courts of Massachusetts. First, Massachusetts courts do not hesitate to stay Massachusetts cases in favor of parallel proceedings elsewhere. That is, while the Delaware courts will rarely, if ever, stay Delaware merger litigation in favor of merger litigation pending elsewhere, Massachusetts courts seem to lack any such policy and will grant requests to stay Massachusetts merger litigation when parallel litigation is underway elsewhere, particularly where the litigation is governed by the law of another jurisdiction (such as Delaware).
Second, Massachusetts courts are reluctant to interfere with or enjoin mergers of public companies in Massachusetts. There is a growing line of cases — from Judge Agnes’ detailed decision in the 2007 Westborough Savings Bank merger case,to the merger litigation involving Merck’s $7.2 billion acquisition of Massachusetts-based Millipore Corporation chronicled in 2010 in the Boston Bar Journal, to the recent Massachusetts Appeals Court decision concerning Oracle’s acquisition of Phase Forward Corporation — wherein the Massachusetts courts have either refused plaintiffs’ requests to expedite proceedings or denied a motion to enjoin a merger. Third, Massachusetts courts will generally approve the award of attorneys’ fees in merger cases when presented with arms’ length settlements between plaintiffs and defendants.
While the tide may turn and merger litigation may become less commonplace, presently, it is all but certain that larger deals will attract litigation. Massachusetts in particular has seen its share of merger litigation and should continue to until the phenomenon recedes, if it ever does. Accordingly, deal lawyers in Massachusetts and elsewhere should approach M&A activity with the risk of litigation in mind.
Read Matthew Baltay’s biography here.
 Cain, Matthew D. and Davidoff, Steven M., “A Great Game: The Dynamics of State Competition and Litigation,” at 11 (April 1, 2012) (free SSRN registration required).
 Cain, Matthew D. and Davidoff, Steven M., “Takeover Litigation in 2011,” at 2 (February 2, 2012); Daines, Robert M. and Koumrian, Olga, “Recent Developments in Shareholder Litigation Involving Mergers and Acquisitions, March 2012 Update,” Cornerstone Research
 Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986). There is some uncertainty as to whether Massachusetts corporations that decide to sell may consider factors other than price alone, including, for example, the interests of employees and customers and the local, regional and national economy. Gut v. MacDonough, C.A No. 07-1083, 23 Mass. L. Rptr. 110, 2007 WL 2410131, at *11 (Mass. Super. Aug. 14, 2007).
 See also Clark, D. and Kramer Mayer, M., “Anatomy of a Merger Litigation,” Nera Economic Consulting (April 4, 2012), at 2 (discussing the nineteen law firms that issued press releases investigating the NetLogic Microsystems acquisition once it was announced and suggesting “[t]he purpose of the press release was simple: the law firm was looking for a client. Despite the considerable ingenuity of plaintiffs’ lawyers, they have not yet figured out how to file a lawsuit without a client.”).
 According to a recent NERA study, one-third of all cases are filed within two days of the announcement of the deal and nearly 60% are filed within one week of the announcement. Clark, D. and Kramer Mayer, M., supra, at 4.
 With 2% of the national population, Massachusetts has 6% of the country’s public companies involved in merger litigation (a third of which are incorporated under Massachusetts law and the remainder principally under Delaware law). See Cain and Davidoff, “A Great Game: The Dynamics of State Competition and Litigation,” supra, at 32.
 In litigation involving the mergers of the following companies, the Massachusetts court stayed in favor of parallel litigation in Delaware: 3Com Corp. (Davenport v. Benhamou, CA No. 07-3793F, 2007 WL 4711512 (Mass. Super. Dec. 20, 2007)); Sepracor Inc. (Gianquinto v. Sepracor, Inc., CA No. 09-3833-BLS-2 (Mass. Super. Sept. 25, 2009)); US Surgical (Donnay v. Chamoun, CA No. 09-4249-BLS-2 (Mass. Super. Nov. 6, 2009)); Airvana Inc. (Short v. Battat, CA No. 10-0042-BLS-2 (Mass. Super. June 18, 2010)); BJ’s Wholesale Club, Inc. (Puzey v. BJ’s Wholesale Club, Inc., CA No. 2011-11339-MLW (D. Mass. Mar. 16, 2012) (granting motion to stay state law claims)). In at least one case, the Massachusetts court stayed litigation involving a company incorporated under Massachusetts law in favor of litigation pending in Florida: BlueGreen Corporation (Caltagirone v. Levan, CA No. 2011-4183-BLS-2 (Mass. Super. Jan. 17, 2012)).
 Gut v. MacDonough, C.A. No. 07-1083, 23 Mass. L. Rptr. 110, 2007 WL 2410131, at *11 (Mass. Super. Aug. 14, 2007) (Hudson Savings Bank’s acquisition of Westborough Bank).
 Carroll, J. and Brown, M., “Mergers & Acquisitions: Massachusetts Courts Reject Injunction Attempts,” The Boston Bar Journal (Fall 2010).
 In the following merger cases, the Massachusetts court denied plaintiffs’ motion to expedite: Weitman, Individually & On Behalf Of All Others v Tutor et al, MICV2008-02351, 24 Mass.L.Rptr. 343, 2008 WL 4058343 (Mass. Super. Aug. 13, 2008) (merger of Perini and Tutor); Ahern v. Wainwright Bank, C.A. No. 10-2681-BLS2 (Mass. Super. Oct. 2010); Breene v. NStar, C.A. No. 10-4115-BLS2 (Mass. Super. Ct. Mar. 2, 2011).
 In the following cases, the court denied plaintiffs’ motion for preliminary injunction to enjoin the merger: Gut v. MacDonough, C.A. No. 07-1083, 23 Mass.L.Rptr. 110, 2007 WL 2410131 (Mass. Super. Aug. 14, 2007) (Hudson Savings Bank’s acquisition of Westborough Bank); Ahern v. Wainwright Bank, C.A. No. 10-2681-BLS2 (Mass. Super. Oct. 2010); Breene v. NStar, C.A. No. 10-4115-BLS2, 2011 WL 4837265 (Mass. Super. Mar. 3, 2011); Schnipper v. Watson et al., C.A. No. 09-05439-BLS (Hinkle, J) (May 2010) (Hospira, Inc.’s tender offer for Javelin Pharmaceutical Inc.); Elliot v. Millipore Corp., C.A. No. 10–853–BLS2 (Mass. Super. June 4, 2010); Erlich v. Phase Forward Corp., C.A. No. 10-1463 (Mass. Super. June 21, 2010), affirmed 80 Mass. App. Ct. 671 (2011).