Cornerstone Releases Updated Study of M&A Litigation

On April 25, 2012, Cornerstone Research released an interesting report entitled “Recent Developments in Shareholder Litigation Involving Mergers and Acquisitions—March 2012 Update.”  The report notes that the incidence of litigation in connection with mergers valued at $500 million or greater rose from 57% in 2007 to 96% in 2011.  This observation has already caught the attention of the Delaware Chancery Court where Vice Chancellor Laster commented in a teleconferenced ruling, “I don’t think for a moment that 90%—or based on recent numbers—95% of deals are the result of a breach of fiduciary duty.  I think there are market imbalances here and externalities that are being exploited.  What this means is that the Court needs to think carefully about balancing.”

The report also shows that the number of lawsuits per litigated deal increased from an average of 2.8 in 2007 to 6.2 in 2011.  The absolute count of lawsuits involving deals with values of $500 million or greater also nearly doubled from 289 in 2007 to 502 in 2011.  The report also noted that as of March 2012, 67 lawsuits have already been reported for 13 out of 17 deals announced during January and February.

Lesser-Known SEC Rule Compels Dismissal of Securities Act Claims

Relying on a lesser-known U.S. Securities and Exchange Commission rule, the Southern District of New York dismissed over forty underwriter and director defendants from a securities action against General Electric Co. on April 18, 2012.  Shareholders alleged that GE made false statements in connection with a $12 billion secondary stock offering in 2008, including misrepresentations about its ability to sell commercial paper.  GE, which was mostly financed by 30-day commercial paper, encountered difficulties in funding its operations after the collapse of Lehman Brothers in September 2008.

District Judge Denise Cote ruled that older statements incorporated by reference into the offering documents were modified and superseded by subsequent statements under SEC Rule 412, and that statements made by GE in its Forms 10-K between 2004 and 2007, expressing confidence in its commercial paper position, could not be relied upon to state a Securities Act claim.  Citing SEC Rule 412, Judge Cote found that the 2008 offering’s prospectus supplement warned of potentially impaired access to the commercial paper market, and thus “directly modif[ied] and replace[d] the earlier statements” of GE.  Judge Cote also rejected lead plaintiff’s argument that the newer statements were merely standardized “boilerplate.”

The ruling modified a January 2012 opinion from District Judge Richard Holwell in one of his last opinions before retiring from the bench.  Upon reassignment of the matter Judge Cote granted defendants’ pending motions for reconsideration of the January opinion with respect to all surviving claims under the Securities Act and Exchange Act.  Judge Cote’s ruling did not dispose of the entire action, keeping intact the Exchange Act claims against GE and its chief financial officer for alleged misstatements about the quality of the company’s loan portfolio.

In re: General Electric Co. Securities Litigation, case number 1:09-cv-01951, United States District Court for the Southern District of New York.