Exclusive Forum Bylaws Are Going Mainstream: What’s Next, Bylaws Eliminating Shareholder Class Actions?

Baltay_Matthewby Matthew C. Baltay

Legal Analysis

Bylaws and charter provisions controlling shareholder litigation are hot topics in corporate governance.  Most notable are “exclusive forum bylaws” that require that shareholder litigation be brought in a specific jurisdiction, most commonly the state of incorporation (often Delaware) or the state where the company is headquartered.  These provisions have now been tested in court and, to the chagrin of shareholders’ rights champions and the delight of some boards and corporate advisers, are becoming generally accepted and enforceable.

Companies, practitioners, and the courts are now assessing just how far litigation-control bylaws and charter provisions might go.  The new frontier includes fee-shifting bylaws that require shareholders who unsuccessfully sue corporations to pay the corporate legal bill and provisions that require shareholder disputes to be arbitrated.  Given recent Supreme Court decisions upholding contractual arbitration provisions that waive class actions, including as to federal statutory claims, it is conceivable that future bylaws will preclude shareholder class actions, requiring instead arbitration on an individual-claim basis, possibly with fee-shifting to boot.

In Massachusetts, corporations are beginning to adopt exclusive forum provisions.  Practitioners here should familiarize themselves with these, and other, emerging litigation-control provisions including arbitration and fee-shifting clauses.

This article reviews exclusive forum bylaws and the state of other emerging provisions, including those in Massachusetts, and assesses the pros and cons of adopting them.

Contours of Exclusive Forum Provisions

Exclusive forum provisions provide that a given court, generally in the state of incorporation (or, less frequently, in the state where the company is headquartered, if different) shall be the sole and exclusive forum for intra-corporate and shareholder disputes.  Four types of disputes are generally covered:  (1) derivative actions; (2) actions asserting claims of breach of a fiduciary duty owed by a director, officer or company employee to the company or its shareholders; (3) actions asserting claims pursuant to the corporate statutory code of the state of incorporation or the company’s certificate of incorporation or bylaws; and (4) actions asserting claims governed by the internal affairs doctrine.[1]  Such provisions may be inserted into corporate bylaws, often by the board of directors without shareholder approval, or in the corporate charter with shareholder approval.  One unexplored question is whether other shareholder suits, including, for example, for federal securities fraud, could be included.

Exclusive Forum Bylaws – How We Got Here

Corporations, like litigants in general, have always faced the risk of multi-forum litigation in which the same claims are litigated in different courts.  The risk is particularly prevalent in shareholder litigation in which different representative plaintiff shareholders purporting to represent the same class of shareholders bring dueling claims in different jurisdictions.  This issue has been pronounced in merger litigation, in which some 95% of all public company mergers result in shareholder litigation and half to two-thirds of such litigation historically is filed in two or more jurisdictions.[2]  Needless to say, multi-forum litigation drains corporate resources, increases the distraction and hassle of litigation, magnifies the perceived litigation problem, and risks inconsistent rulings and judgments.

The concept of exclusive forum charter and bylaw provisions gained traction after the Delaware Court of Chancery remarked in 2010 that one solution to multi-forum litigation would be the adoption of exclusive forum provisions.  Practitioners and corporate boards took note and began implementing exclusive forum provisions, generally designating the Delaware Chancery Court as the exclusive forum for shareholder litigation.  Many companies adopted such bylaw provisions by unilateral resolution of the corporation’s board of directors while a few put the matter to shareholders by way of proposed amendments to corporate charters.

In early 2012, the plaintiffs’ bar filed a string of test cases in Delaware challenging the validity of such provisions.  In 2013, Chancellor Leo Strine (who has since been elevated to Chief Justice of Delaware’s Supreme Court) issued a landmark decision upholding the validity of exclusive forum bylaws unilaterally adopted by boards of directors.  Boilermakers Local 154 Retirement Fund v. Chevron Corporation, 73 A.3d 934 (Del. Ch. 2013).  The Chancery Court ruled that boards are statutorily empowered to adopt such bylaws so long as the specific corporate articles of organization permit director amendment of bylaws, which is generally the case.  The court observed that bylaws constitute a form of contract between corporations and their shareholders and that bylaws unilaterally adopted by a corporate board become a part of the contract.  The Delaware Supreme Court has since affirmed the validity of exclusive forum bylaws unilaterally adopted by boards of directors.

Exclusive Forum Bylaws – More Recent Developments

Since the Delaware Chancery Court issued its Boilermakers v. Chevron decision in 2013, a growing number of corporations, both public and privately-held, have adopted exclusive forum provisions.  While there are no precise tallies, some 250 publicly-traded companies had adopted exclusive forum bylaws by the time Boilermakers v. Chevron was decided, and another 100 Delaware corporations adopted such provisions in the four months following the decision.[3] The majority of corporations adopting exclusive forum bylaws have done so through unilateral board action, although a number have put the matter to shareholders in the form of charter amendments, including some prior to an IPO.

It has also become common for publicly-held corporations that are being taken over to adopt exclusive forum bylaws simultaneously with the announcement of the takeover.  For example, when Massachusetts-based Hittite Microwave Corporation announced it was being acquired in June 2014, it simultaneously announced that its board of directors had adopted an exclusive forum bylaw designating Delaware Chancery Court as the exclusive venue for shareholder litigation.  Similarly, when Massachusetts corporation MicroFinancial, Inc. announced in December 2014 that it was being acquired, its board adopted a bylaw amendment setting the Business Litigation Session of the Massachusetts Superior Court as the exclusive forum for shareholder litigation.  Both provisions worked as intended and the anticipated litigation took place only in the designated courts.  More broadly, the recent prevalence of exclusive forum bylaws (adopted at the time of merger) has caused multi-forum merger litigation to drop significantly.[4]

Exclusive forum provisions have also been challenged in secondary jurisdictions (i.e., those other than the jurisdiction designated as the exclusive forum).  These cases have been in the context of motions to dismiss the duplicative multi-forum action on grounds it is barred by an exclusive forum provision.  In virtually all instances, the courts have upheld the validity of forum selection clauses and have dismissed the secondary actions in favor of the identified exclusive forum.  Thus, for example, courts in California, Illinois, Louisiana, New York, Ohio and Texas have all ruled in recent months that exclusive forum bylaws designating one forum (Delaware) were enforceable, with the result being the dismissal of litigation filed in those jurisdictions.[5]

Another notable recent decision is City of Providence v. First Citizens Bancshares, Inc., 99 A.3d 229 (Del. Ch. 2014).  There, the Delaware Chancery Court dismissed a class action lawsuit challenging a corporate merger because a bylaw amendment, adopted by the board of directors when the merger was announced, designated North Carolina, where the company was headquartered, as the exclusive forum.  While pending legislation may alter the rule, this decision establishes that Delaware corporations may designate the courts of the state they are headquartered in as the exclusive forum for shareholder litigation and the Delaware courts will respect that choice.

Three decisions, however, have gone the other way.  Two of these are federal court decisions predating the Delaware Boilermakers v. Chevron decision, and they hold that under federal common law, bylaws not in effect when the shareholder purchased its shares, and that were unilaterally adopted by the board thereafter, are not binding on the shareholder.[6]  A more recent federal court decision, however, upheld an exclusive forum provision and characterized these two earlier federal decisions as outdated.[7]

The third decision to strike down an exclusive forum bylaw was issued by an Oregon trial court in August 2014.  Roberts v. TriQuint Semiconductor, Inc., C.A. No. 1402-02441, 2014 WL 4147465 (Cir. Ct. Or. Aug. 14, 2014).  The matter involved a bylaw designating Delaware as the exclusive forum.  The provision was adopted by the board on the day the company announced it would be acquired.  The court refused to uphold the provision and declined to dismiss the duplicative Oregon action because the board adopted the bylaw after the wrongdoing alleged in the suit.  The court noted that it would have upheld the provision and dismissed the Oregon action “had the board . . . adopted [the bylaw] prior to any alleged wrongdoing, and with ample time for shareholders to accept or reject the change.”  The Oregon decision is the only post-Boilermakers v. Chevron decision that has refused to uphold an exclusive forum bylaw.  The Oregon Supreme Court has granted mandamus to review the trial court’s decision; oral argument is set for June 2015.  While the Oregon decision is an outlier and is subject to reversal, it may caution in favor of adopting litigation-control bylaws on a “clear day” prior to major transactions or circumstances that may predictably lead to litigation.

Fee-Shifting Bylaws

On the heels of exclusive forum bylaw amendments comes an even more far-reaching corporate litigation-control device in the form of fee-shifting.  In a bombshell decision in May 2014, the Delaware Supreme Court held that the fee-shifting bylaw at issue was valid.  ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A.3d 554, 558 (Del. 2014).  The subject bylaw provision was unilaterally adopted by the board of directors and provided that a plaintiff bringing suit in an intra-corporate dispute must pay the corporation’s legal expenses if the plaintiff is unsuccessful.  The court also made clear that the bylaw amendment would apply to those who purchased their corporate interests prior to the bylaw’s adoption.  At issue was a non-stock corporation which operates a professional men’s tennis tour, with the members being the organizations that sponsor individual tournaments.  It is possible that the rule will be limited in future cases to non-stock corporations.  Indeed, one then-justice of the Delaware Supreme Court has stated that the decision does not address the rule applicable to stock corporations, while one Vice Chancellor of the Delaware Chancery Court has stated informally that the rule should not apply to stock corporations.  Nevertheless, the decision contains broad language that could apply equally to stock corporations.

Following the Delaware Supreme Court’s fee-shifting bylaw decision, the plaintiffs’ bar and institutional investors including large pension funds mobilized to have the decision overturned by the Delaware legislature.  Proponents of the decision, including the U.S. Chamber of Commerce, lobbied the Delaware legislature not to take action.  In early March 2015, legislation was put before the Delaware legislature that will, if passed, prohibit fee-shifting for Delaware stock corporations.  The proposed legislation also would expressly permit exclusive forum bylaws for Delaware corporations so long as they designate Delaware as the forum (in effect overruling City of Providence v. First Citizens Bancshares, Inc., 99 A.3d 229 (Del. Ch. 2014)), and prompting some commentators to suggest the proposed legislation is intended in part to keep the Delaware courts and bar busy).  Lastly, the proposed legislation would also forbid arbitration bylaws (discussed below) for intra-corporate disputes.  Observers anticipate that the Delaware legislature will act on the legislation one way or another before the session recesses in June 2015.

Corporations have not rushed to adopt fee-shifting bylaws.  As of early 2015, only some 40 corporations have adopted fee-shifting bylaws, including, recently-public Alibaba.[8]  Aside from straight fee-shifting provisions, other variants are being discussed, including, for example, bylaws barring a plaintiff from recovering its attorney’s fees in merger litigation.  Presumably, most corporations are awaiting further developments, including on the legislative front, before leaping into the fray.  Nevertheless, absent legislative action, there is the very real possibility that fee-shifting bylaws may be here to stay.[9] And regardless of whether Delaware reverses course legislatively, litigation-control provisions will be part of the landscape moving forward.

Arbitration and Other Litigation-Control Bylaws

Once one accepts that bylaws are viewed as contractual in nature, there is no reason why corporate bylaws could not include the wide variety of litigation-control devices that practitioners commonly see in commercial and consumer contracts.  For example, not only are forum selection and fee-shifting provisions common in contracts, but many agreements contain arbitration clauses, including those with class action waiver provisions.  Provisions requiring that shareholder claims be subject to arbitration, not litigation, are starting to appear in corporate bylaws.  The first test cases have upheld the provisions.  In a set of decisions in 2013 and 2014, a state trial court in Maryland upheld a bylaw provision of a publicly-traded real estate investment trust (REIT) requiring shareholders to arbitrate rather than litigate claims; the provision also set forth that in no event would plaintiff be awarded attorney’s fees.  Corvex Management LP v. Commonwealth REIT, No. 24-C-13-001111, 2013 Md. Cir. Ct. LEXIS 3 (Cir. Ct. Balt., May 8, 2013); Katz v. Commonwealth REIT, No. 24-C-13-001299 (Cir. Ct. Balt., Feb. 19, 2014).  In so ruling, the Maryland court followed the Delaware decision in Boilermakers v. Chevron and applied its reasoning to the arbitration bylaw at issue.

Interestingly, a group of shareholders of the same Maryland REIT subsequently brought a derivative suit in federal court in Boston for declaratory judgment that arbitration bylaws are invalid.  United States District Court Judge Denise Casper rejected the challenge.  Del. County Emples. Ret. Fund v. Portnoy, 13-10405-DJC, 2014 U.S. Dist. LEXIS 40107 (D. Mass. Mar. 26, 2014).  The court first explained that, pursuant to res judicata principles, the issue had already been decided by the Maryland court.  The decision also recited that arbitration bylaws are supported by a line of cases, including Supreme Court precedent on enforceability of arbitration clauses.  Accordingly, the court upheld the provision.  The opinion also rejected the challenge that the inability of a plaintiff to recover attorney’s fees or sue in federal court conflicts with federal securities laws.

Arbitration bylaws could be taken a step further to require that any claims be brought on an individual and not class basis.  Such provisions would find support in the Supreme Court’s recent American Express decision, which held that a provision in a consumer contract requiring individual arbitration is enforceable even though it deprives plaintiffs the ability to pursue in court federal fraud and Sherman Act anti-trust class actions.[10]

Another recent bylaw amendment by a Florida public company limits the right of shareholders to sue the company and its directors and officers to those shareholders owning or representing 3 percent or more of the shareholder base.  Plaintiffs promptly challenged the far-reaching provision in court; the litigation remains pending.[11]

One source of push-back comes from regulators.  The Securities and Exchange Commission publicly criticizes provisions restricting shareholders’ ability to seek redress under the federal securities laws and is reluctant to allow IPOs to go forward where the corporate charter or bylaws contain a shareholder-suit arbitration provision.[12]  Other regulators might also get into the fray, including possibly FINRA and the new federal Consumer Financial Protection Bureau.[13]

Massachusetts

Corporations in Massachusetts have begun to adopt exclusive forum bylaws, either designating Massachusetts or Delaware as the exclusive forum for shareholder litigation.  It is only a matter of time before Massachusetts corporations begin to experiment with other litigation-control provisions.

Although the Massachusetts state courts have not yet had occasion to rule on the validity of any such provisions (even though as noted above, the federal court in Boston has), one can expect they will do so before long.  There would not appear to be any reason why the Massachusetts courts would not uphold the validity of a forum selection clause designating another jurisdiction as the exclusive forum, as Delaware has done.  Not only do the Massachusetts courts look to Delaware on matters of corporate law, but the building blocks are already in place, as Massachusetts law allows directors to amend bylaws[14] and it regards bylaws as contractual in nature.[15]

Should Your Corporation Adopt Such Provisions?

A question for many corporations will be whether they should adopt litigation-control provisions.  One risk of doing so is inviting more litigation.  Early adopters of litigation-control bylaws have invariably been sued by plaintiffs’ lawyers for the very act of adopting them.  While the risk now seems to have passed, at least as to exclusive forum bylaws, corporations contemplating fee-shifting or arbitration bylaws might wait until they gain more acceptance and traction.

Another consideration is the reaction of the shareholder base.  Glass Lewis and Institutional Shareholder Services (ISS), two of the better-known shareholder advisory firms, generally oppose provisions limiting the ability of shareholders to bring claims for redress of wrongs.  Both generally advise against the adoption of such provisions when put to the shareholders and may recommend against reelection of directors who unilaterally adopt bylaws substantially affecting shareholder rights.  Glass Lewis also recommends voting against the entire governance committee where a corporation’s pre-IPO charter or bylaws limit the ability of shareholders to pursue full legal recourse without putting the provisions to shareholder approval.  Given this, corporations, particularly those with pending shareholder issues, might consider adopting litigation-control provisions by way of amendments to articles of incorporation effected by shareholder approval.  Privately-held corporations may be more free to adopt such provisions.

Of all of the various litigation-control provisions, corporations first might consider adopting exclusive forum bylaws.  While multi-forum litigation is not the greatest threat to corporate well-being, it only takes one instance of multi-forum litigation or litigation in a distant, unfriendly forum for a corporation to wonder why it does not have an exclusive forum provision designating a preferred forum.  Corporations located in Massachusetts should consider provisions designating local Massachusetts courts, including the high-performing Business Litigation Session, as their exclusive forum for shareholder actions.

The risks to a corporation of adopting fee-shifting or arbitration provisions seem greater because the mere act of adopting them may attract litigation.  As noted, one solution might be to put any considered provisions to the shareholder base, although even that approach may not be immune to challenge.  Regardless, it seems clear that litigation-control provisions will remain and become an increasing part of corporate governance going forward.

 

Matthew Baltay is a partner in Foley Hoag’s Litigation Department.

 

Endnotes

[1]  The internal affairs doctrine concerns those matters that pertain to the relationships among or between a corporation and its officers, directors, and shareholders, and provides that the law of the state of incorporation governs those relationships.

[2]  Matthew D. Cain and Steven Davidoff Solomon, “Takeover Litigation in 2013” (January 9, 2014); Olga Koumrian, “Shareholder Litigation Involving Acquisitions of Public Companies: Review of 2014 M&A Litigation,” Cornerstone Research (February 2015).

[3]  Claudia H. Allen, “Trends in Exclusive Forum Bylaws,” Director Notes—The Conference Board (Jan. 2014).

[4]  Olga Koumrian, “Shareholder Litigation Involving Acquisitions of Public Companies: Review of 2014 M&A Litigation,” Cornerstone Research (February 2015).

[5]  See Groen v. Safeway Inc., No. RG14716641 (Alameda Cty Cal., May 14, 2014); Miller v. Beam Inc., No. 2014 CH 00932 (Cook Cty., Ill., Mar. 5, 2014); Genoud v. Edgen Group, No. 625,244 (19th Jud. Dist. Ct., East Baton Rouge, La., Jan. 17, 2014); Hemg Inc. v. Aspen University, 2013 WL 5958388 (Supr. Ct, NY, Nov. 4, 2013); North v. McNamara, 2014 U.S. Dist. LEXIS 131672 (S.D. Ohio, Sept. 19, 2014); Daugherty v. Ahn, CC-11-06211 (Cty. Ct. No. 3, Dallas Cty. Tex., Feb. 15, 2013).

[6]  Galaviz v. Berg, 763 F. Supp. 2d 1170 (N.D. Cal. 2011) (denying motion to dismiss derivative action on the basis of an exclusive forum bylaw); In re Facebook, Inc., IPO Sec. & Derivative Litig., 922 F. Supp. 2d 445, 463 (S.D.N.Y. 2013).

[7]  North v. McNamara, 2014 U.S. Dist. LEXIS 131672 (S.D. Ohio Sept. 19, 2014).

[8]    For a list of these companies, see link here.

[9]   The Oklahoma legislature passed legislation in 2014 governing shareholder derivative actions pursuant to which the nonprevailing party must pay the prevailing party’s reasonable attorney’s fees.

[10]  American Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013).

[11]  Rothenberg v. Imperial Holdings, Inc. (Cir. Ct.. Palm Beach Cty, Fla., filed Jan. 20, 2015).

[12]  In 2012, the SEC forced the Carlyle Group to withdraw a proposed provision from an IPO registration statement that would have required all shareholder suits, including those pursuant to federal securities laws, to be resolved by arbitration on an individual, not class basis.  SEC “no action” letter to Gannett Co., Inc., dated February 22, 2012 (allowing public company to omit shareholder proposal that would have inserted shareholder suit arbitration provision).

[13]  FINRA disciplined Charles Schwab in 2012 for including an arbitration class action waiver in its consumer contracts in violation of a FINRA rule prohibiting contractual provisions purporting to waive judicial class actions by customers.

[14]  Mass. Gen. L. ch. 156D, §10.20(a) (allowing directors to amend bylaws if the charter so provides and as to matters not reserved for shareholders).

[15]  Merriam v. Demoulas Super Mkts., Inc., 464 Mass. 721, 727, 985 N.E.2d 388 (2013).


Merger Litigation: Coming to a Deal Near You

By Matthew C. Baltay

Legal Analysis

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.”[1]  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.[2]

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.[3]

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.” [4]  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.

The Litigation

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.[5]

Next, complaints are filed, often within a matter of days of the initial announcement of the deal,[6] 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.”[7]  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.”[8]

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.

Disclosure-Only Settlements

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).[9]  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.[10]  The recent Del Monte Foods merger litigation, for example, ended with a payment of $89 million to shareholders.

Resisting Plaintiffs

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.[11]

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.[12]  Indeed, Massachusetts is the sixth most active state in terms of deal litigation, behind only Delaware, California, Texas, New York and Pennsylvania.[13]

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,[16] 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[17] or denied a motion to enjoin a merger.[18]  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.

[1] Stanford University Professor Robert M. Daines (quoted by Daniel Fisher in “Lawyers Challenge ‘Almost Every’ Merger,” Cornerstone Study (April 26, 2012)).

[2] 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).

[3] 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

[4] 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).

[5] 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.”).

[6] 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.

[7] Daines and Koumrian, supra, at 3.

[8] See Clark and Kramer Mayer, supra, at 4 (suggesting that the filing of multiple suits by different firms is done because competing firms “want in on the game.”).

[9] Cain and Davidoff, “A Great Game:  The Dynamics of State Competition and Litigation,” supra, at 33.

[10] Daines and Koumrian, supra, at 11.

[11] Id. at 9.

[12] 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.

[13] Daines and Koumrian, supra, at 8.

[14] 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)).

[15] 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).

[16] Carroll, J. and Brown, M., “Mergers & Acquisitions:  Massachusetts Courts Reject Injunction Attempts,” The Boston Bar Journal (Fall 2010).

[17] 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).

[18] 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).