Merger-challenge class actions have become very popular in the last decade. (For a great source of data, check Cornerstone Research’s surveys on the subject.) They operate similar to traditional securities class actions, but have found a way of resurrecting the sense of urgency that the Private Securities Litigation Reform Act (PSLRA) removed; they do it by litigating deals that are already in progress. Because the litigation threatens to disrupt an otherwise-lucrative deal, it is likely that the parties will pay to settle it quickly.
In general, merger class actions have gained a reputation as “low-hanging fruit” for class action firms looking for a quick buck. One recent paper, by “Deal Professor” Steven M. Davidoff, Penn Law’s Jill Fisch, and Fordham Law’s Sean J. Griffith, Confronting the Peppercorn Settlement in Merger Litigation: An Empirical Analysis and a Proposal for Reform, argues that merger litigation that results in just disclosures tends to offer no benefit whatsoever to shareholders (making them the proverbial “peppercorn” settlement). (By contrast, merger litigation that results in some amendment to the deal offers at least minimal value, but “amendment settlements” tend to be rarer beasts.)
Washington University’s Adam B. Badawi published an interesting strategic look at the merger class action last year in the Washington University Law Review. In Merger Class Actions in Delaware and the Symptoms of Multi-Jurisdictional Litigation, he examines two seemingly contradictory trends involving the Delaware Chancery Court’s role in merger class actions: from 2005-2011, plaintiffs were turning to other courts as venues for merger challenges. But starting in 2011, cases began to return to Delaware. The exodus from Delaware is largely understood to have occurred after the Chancery Court grew more critical of merger class actions. Badawi theorizes that the return may be driven by strategic concerns:
It appears that filing a case in Delaware may provide a number of strategic benefits to out-of- state counsel who have lost the race to the courthouse in a non-Delaware jurisdiction. Given that foreign jurisdictions often select lead counsel on the basis of the first to file the case, out-of-state counsel who lose the race to the courthouse have little to gain by filing in that foreign jurisdiction. If, however, these counsel have a plausible chance at being named as lead counsel in Delaware—where the selection of lead counsel largely depends on the size of a plaintiffs’ shareholdings and the perceived quality of its law firm—they can file in Delaware.
(Emphasis added, internal footnote omitted.)
Most interesting, though, is the recent study by Case Western’s C.N.V. Krishnan, Steven Davidoff, and Vanderbilt’s Randall S. Thomas, Zealous Advocates or Self-Interested Actors? Assessing the Value of Plaintiffs’ Law Firms in Merger Litigation. This paper surveys a large number of merger lawsuits over the last decade, and concludes that they can be broken into two tiers. The top tier are brought by the top five to ten plaintiffs’ firms at any given time, involve more contentious deal terms, more frequent docket activity, and result in greater benefit to shareholders. The bottom tier are brought by the remaining three hundred or so firms that have filed merger class actions, and look a lot more like the stereotypical merger lawsuit.
For most corporate defendants, merger class actions do not occur with the same frequency as other litigation. So it is well worth the time to collect information on the landscape should you be considering a large deal. These three studies are an excellent place to start.