M&A litigation in the US continued to evolve in significant ways in 2018. As widely reported, stockholders file lawsuits challenging the vast majority of US public company M&A transactions. Prior to 2016, many of these cases were resolved through ‘disclosure-only’ settlements - ie, settlements whereby the defendants agree to provide supplemental disclosures to stockholders in advance of the approval vote; the stockholder plaintiffs agree to dismiss the complaint and provide the defendants with a release; and plaintiffs’ counsel, through agreement or via an application to the court, receives an attorneys’ fee award for having caused the defendants to provide the supplemental disclosures to the stockholders.
In 2016, the Delaware Court of Chancery issued its landmark decision in In re Trulia, Inc Shareholder Litigation. The Court of Chancery concluded that many disclosure-only settlements provided limited value to stockholders while benefitting plaintiffs’ counsel (in the form of fee awards) and deal parties (in the form of broad releases). For that reason, the Chancery Court held that, going forward, it would approve disclosure-only settlements only where the supplemental disclosures provided to stockholders were ‘plainly material’. As a result of the Trulia decision, many disclosure-related cases instead are resolved through mootness fees - ie, after supplemental disclosures are made by the company that moot the plaintiff’s disclosure-related claims, the plaintiff agrees to voluntarily dismiss the case in exchange for an agreed attorneys’ fee amount paid to plaintiff’s counsel. Depending on the jurisdiction, mootness fees may not require court approval. In addition, to avoid the impact of Trulia, many stockholder plaintiffs began filing M&A lawsuits in federal court asserting disclosure-related claims under the Securities Act of 1934 (the Exchange Act), rather than in state court.
In 2018, the United States Court of Appeals for the Ninth Circuit issued its decision in Varbajedian v Emulex Corp in which it held that claims under section 14(e) of the Exchange Act, which prohibits the making of false or misleading statements in tender offer communications, require only that the defendants negligently misled investors and not, as other courts had long held, that defendants acted with scienter, or the intent to deceive investors. The United States Supreme Court agreed to hear an appeal of the Ninth Circuit’s decision, but recently dismissed the appeal as improvidently granted. As a result, the United States Supreme Court did not resolve the conflict between United States federal courts on this issue. Thus, until the United States Supreme Court takes this issue up again, there will continue to be a lack of uniformity among United States federal courts regarding the standard for claims under Section 14(e) of the Exchange Act.
A second notable development concerns the material adverse effect (MAE) clauses common in M&A agreements (also known as material adverse change (MAC) clauses). Although MAE clauses vary significantly from agreement to agreement, these provisions typically give the buyer the option not to close an M&A transaction if, during the period between signing and closing, the seller experiences events or changes that adversely and materially impact its financial condition. Prior to 2018, merger parties often raised the possibility of invoking MAE clauses, and there were a handful of litigated cases, but no Delaware court ever had held that a buyer justifiably declined to close or terminated a transaction on the basis of an MAE clause. That changed with the Court of Chancery’s 246-page decision in Akorn, Inc v Fresenius Kabi AG, which was later affirmed by the Delaware Supreme Court. Among other things, the Akorn court found that, during the post-signing period, the seller lost hundreds of millions of dollars in value due to pervasive regulatory issues while experiencing year-over-year earnings declines of more than 55 per cent. Although the facts leading to the Akorn court’s MAE conclusion are extreme, the case provides important guidance for MAE standards generally, as well as with respect to the manner in which buyers should proceed with closing efforts while evaluating whether or not to invoke an MAE clause.
A third significant development relates to the power of a corporation to choose where it will be sued by its stockholders. In recent years, many US corporations adopted ‘forum selection’ by-laws providing that breach of duty claims filed by company stockholders against board members must be brought in a stated jurisdiction (often Delaware). Delaware courts have approved these forum selection by-laws to the extent they address fiduciary duty and other claims involving the ‘internal affairs’ of the company. Several companies attempted to expand these by-laws to cover claims filed by stockholders against the corporation under the federal securities laws. In Sciabacuccho v Salzberg, the Delaware Court of Chancery invalidated these expanded by-laws on the ground that rights under the federal securities laws were not part of the internal affairs of a corporation, nor were they within the ‘corporate contract’ between investors and other corporate constituents.
Another trend concerns appraisal actions. Following the Delaware Supreme Court’s 2017 decisions in Dell, Inc v Magnetar Global Event Driven Master Fund Ltd, and DFC Global Corp v Muirfield Value Partners LP. Delaware courts determined in several 2018 cases that ‘fair value’ for the stockholder in an appraisal action was significantly less than the amount the stockholder would have received in the transaction. In the recent cases, the Delaware Court of Chancery emphasised that in an appraisal action, stockholders are not entitled to any value arising from synergies created by the transaction at issue, and that the best indicator of fair value in public company cases often may be the unaffected (pre-deal announcement) stock market price. The recent case law substantially increases the risks for investors pursuing an appraisal arbitrage strategy.
Finally, courts in 2018 continued to develop and apply the Delaware Supreme Court’s ruling in Corwin v KKR Financial Holdings. Several decisions confirmed that Corwin ratification can be a powerful defence to breach of fiduciary duty claims that helps resolve stockholder litigation at the pleading stage. Other recent cases, however, illustrate that Corwin is not without limits and that a stockholder complaint will survive a motion to dismiss where the plaintiff can plead facts indicating that stockholder approval was not obtained on the basis of a fully informed vote.
Back to top