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Forum
distribution:
Research concludes M&A class actions produce no benefits, courts and investors
should rely upon appraisal rights
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The paper summarized
below concludes that the current practice of class
action M&A litigation produces no benefits to investors and proposes
policies to discourage it, presenting the following view supporting court
and investor reliance upon the alternative of appraisal rights (see page
43,
February 1, 2014, Steven M. Davidoff of Ohio State
University, Jill E. Fisch of University of Pennsylvania and Sean J.
Griffith of Fordham University: "Confronting the Peppercorn Settlement
in Merger Litigation: An Empirical Analysis and a Proposal for Reform"):
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To the extent our proposal generates a shift to
appraisal proceedings, we would view that shift as an unmitigated
benefit for two reasons. First, the Delaware courts are expert in
valuation methodology and continue to refine the appraisal
proceeding to modernize the mechanism for shareholders to
challenge merger price. Second, appraisal focuses directly on the
issue that is most central to a merger challenge – are
shareholders receiving fair value for their stock? At the end of
the day, whatever disclosure or process issues are involved, the
primary issue from a shareholder perspective is the merger price.[212]
By focusing exclusively on that question, we view appraisal as the
optimal method for providing shareholders with redress. Indeed, as
the Delaware courts have explained, the appraisal proceeding may
provide shareholders with a better remedy than the standard
fiduciary duty claim if the true concern is merger consideration
because an appraisal proceeding requires a judicial determination
of “fair value: while a court will reject a fiduciary duty claim
so long as the merger price is within “the range of
fairness.”[213] The difference is illustrated by the Cede v.
Technicolor litigation in which the court determined, in
ruling on a breach of fiduciary duty claim that the merger
consideration of $23/share was fair,[214] yet, in an appraisal
proceeding, awarded the plaintiffs $28.41/share.[215] Accordingly,
we view the appraisal proceeding as creating appropriate
litigation incentives for both shareholders and their counsel to
bring challenges if and only if they have a reasonable chance of
recovering additional consideration.
[212] Cf.
In re Trados Inc. Shareholder Litig., 73 A.3d 17 (Del. Ch. 2013)
(finding no breach of fiduciary duty where merger price was
determined to be fair).
[213] See Trados, 73
A.3d at 78.
[214] Cinerama, Inc.
v. Technicolor, Inc. (Technicolor III), 663 A.2d 1156 (Del. 1995).
[215] Cede & Co. v.
Technicolor, Inc., 884 A.2d 26, 30 (Del. 2005).
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Note:
The legal foundations of the
Trados and Technicolor litigation cited above were presented on page 4 of
the
September 9, 2013, Jeremy D. Anderson, Erin C. E. Battersby and José P.
Sierra of Fish & Richardson P.C., memorandum to Dell Valuation Trust:
Delaware Appraisal of Fair Value for Standalone Buyouts, and the subsequently
published version,
September 10, 2013, Jeremy D. Anderson and José P. Sierra of Fish &
Richardson P.C. in Law360: "Unlocking Intrinsic Value Through
Appraisal Rights."
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Source:
The Harvard Law School Forum on Corporate Governance and Financial
Regulation, March 14, 2014 posting |
Posted by Steven Davidoff, Ohio State University College of Law, Jill
Fisch, University of Pennsylvania, and Sean Griffith, Fordham
University, on Friday March 14, 2014 at
9:00 am
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Editor’s Note:
Steven M. Davidoff is Professor of Law and Finance at Ohio
State University College of Law. As of July 2014, Professor
Davidoff will be Professor of Law at the University of California,
Berkeley School of Law.
Jill E. Fisch is Perry Golkin Professor of Law and Co-Director
of the Institute for Law & Economics at the University of
Pennsylvania Law School.
Sean J. Griffith is T.J. Maloney Chair in Business Law at
Fordham University School of Law. This post is part of the
Delaware law series, which is cosponsored by the Forum and
Corporation Service Company; links to other posts in the series
are available
here. |
In the US, every M&A deal of any significant size generates
litigation. The vast majority of these lawsuits settle, and the vast
majority of these settlements are for non-pecuniary relief, most
commonly supplemental disclosures in the merger proxy.
The
engine that drives this litigation is the concept of “corporate benefit.”
Under judge-made law, litigation that produces a corporate benefit allows
the court to order plaintiffs’ attorneys’ fees to be paid directly by the
defendants provided that the outcome of the litigation is beneficial to
the corporation and its shareholders. In a negotiated settlement,
plaintiffs will characterize supplemental disclosures in the merger proxy
as producing a corporate benefit, and defendants will typically not oppose
the characterization, as they are happy to pay off the plaintiffs’ lawyers
and get on with the deal. The supposed benefits of these settlements thus
are rarely tested in adversarial proceedings. Knowing this creates a
strong incentive for plaintiffs’ attorneys to file claims, put in limited
effort, and negotiate a settlement consisting exclusively of corrective
disclosures. But is there any real value to these settlements?
Our
answer to this question, based on a new empirical study, is no.
In
our forthcoming article in the Texas Law Review,
Confronting the Peppercorn Settlement in Merger Litigation: An Empirical
Analysis and a Proposal for Reform, we study shareholder voting
behavior in a hand-collected sample of 453 large public company mergers
from 2005-2012. We hypothesize that supplemental disclosures, because they
are in effect “compelled” by the settlement, should produce new and
unfavorable information about the merger and therefore reduce the
percentage of shares voted in favor of the deal. By contrast, amendment
settlements—that is, non-pecuniary relief focusing on revisions to the
merger agreement, most often the termination fee or other deal
protections—should result in a higher percentage of shares voted in favor
of the deal.
Our
regression analyses find some support for the later hypothesis but no
support at all for the former. In short, we find no relationship at all
between supplemental disclosures and shareholder voting behavior.
Disclosure-only settlements appear to have no effect on shareholder
voting.
We
also study the relationship between attorney fee awards and voting
behavior. Our hypothesis is that, if judges are willing to award higher
fees in cases in which the disclosure is most meaningful, those cases
should be associated with fewer votes in favor of the merger. This second
hypothesis similarly lacks empirical support—there is no relationship
between the size of the fee award and shareholder voting behavior. We
conclude that shareholder voting fails to provide evidence of a beneficial
impact from disclosure-only settlements.
We
therefore conclude that courts should reject disclosure-only settlements
as a basis for attorney fee awards. We argue that the simplest mechanism
for achieving this result would be for courts to stop recognizing
supplemental disclosures as a basis for “corporate benefit.” This change
would strike directly at the engine that empowers excess litigation
activity. In advancing this claim, we argue for strengthening the
conceptual separation between state merger law and the federal securities
laws. In effect, we maintain that corporate disclosures are and should be
policed by the federal securities laws and that state courts should focus
on their fundamental role of evaluating the fairness of the merger process
and price. We demonstrate how this efficient specialization would redress
the problem of excessive and wasteful merger litigation.
The
full article is available for download
here.
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