These days almost every public company that announces an agreement to sell itself can expect to be the subject of multiple shareholder class actions challenging the transaction – even if shareholders will be receiving a blowout price for their shares under the terms of the agreement. Many of these cases are baseless, and are brought by plaintiffs hoping to leverage a quick settlement. Their strategy, in blunt terms, is to force a speedy payment by threatening to disrupt or stall the deal. Unfortunately, even if the litigation presents only a small risk of disrupting or delaying the deal, many companies feel obligated to settle rather than risk upsetting the deal.
It’s bad enough that target companies and their boards are forced to deal with these “worthless” “sue-on-every-deal cases,” as Delaware Vice Chancellor Travis Laster once described them, but they often have to deal with them in multiple jurisdictions. Indeed, rarely are shareholder class actions challenging a merger brought in a single forum. Instead, companies and their boards are forced to expend time and money defending against duplicative lawsuits in multiple fora around the country. Read More
Delaware law gives shareholders the right to request corporate books and records in order to investigate issues that are of interest to them. For several decades now, Delaware courts have encouraged shareholders to take advantage of this right as a matter of first course, to use the “tools at hand” and seek company records before filing litigation or making a litigation demand. In recent years, more shareholders (and their attorneys) have been following that advice, and the so-called “Section 220 books and records demand” is more common than ever.
Delaware courts have acknowledged, however, that the shareholder’s right to obtain corporate records must be balanced against the board’s right to manage the company’s business without undue interference. Accordingly, where a shareholder requests mundane company materials like stock ledgers or shareholder lists, the company generally must produce. But where the shareholder seeks more sensitive company records, the law puts the burden on the shareholder to show why the production is necessary. Read More
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.