In M&A Litigation, Attorneys' Fees Under Attack?
While companies involved in mergers and acquisitions have experienced a surge in litigation in recent years, three court decisions last month have taken aim at plaintiffs attorney fees.
The rulingstwo in Delaware and one in Texassuggest a trend towards greater judicial scrutiny of disclosure-only merger litigation settlements and, in particular, attorneys fee awards in such settlements, according to the latest Morrison & Foerster newsletter [PDF].
As Delaware Court of Chancery Chancellor Leo Strine put it in rejecting a $500,000 attorney fee award in In re Transatlantic Holdings Inc., the plaintiffs achieved nothing substantial for the class . . . . [and] participated in no meaningful way in making sure that the class got something meaningful.
Lawsuits following the announcement of an M&A transaction havent always been so commonplace. But the frequency has shot up since the mid-aughts: where 39.5 percent of deals worth more than $100 million were subject to litigation in 2005, 92.1 percent of them were by 2011, according to a study of 1,117 takeovers by University of Notre Dame finance professor Matthew Cain and Ohio State University law professor Steven Davidoff.
Most of the suits examined by Cain and Davidoff settled (71.6 percent); shareholders were compensated in less than five percent of settlements.
All of which prompted Columbia law professor John Coffee Jr. to argue that the new brand of M&A litigation produces little, if any, discernible benefit for the shareholder class, according to a column last month in the New York Law Journal (a CorpCounsel.com sibling publication).
Instead, the vast majority of these cases settle on a disclosure-only basis, with some additional disclosures about the transaction being made to the shareholders, Coffee wrote. Despite [which] the plaintiffs attorneys make out like bandits, receiving a mean fee award in the Cain and Davidoff study of $1.413 million.
Which brings us back to the happenings in the Delaware and Texas courts last month.
First, Delaware: While the reinsurer Transatlantic, which merged with insurer Alleghany Corp. in 2012, did not oppose a motion to settle the resulting shareholder litigation, Chancellor Strine wasnt having it.
In a hearing on the settlement, Chancellor Strine rejected the settlement in strong language, declined to certify a class, and denied the fee application, expressing serious doubts about the usefulness of the agreed upon supplemental disclosures and the adequacy of the named plaintiffs as class representatives, write Morrison & Foersters Joel Haims (who chairs the firms securities litigation, enforcement, and white-collar defense group) and litigation associate James Beha II. Ultimately, on March 18, the case was dismissed.
In a March 19 Delaware decision, In re PAETEC Holdings Corp, the court did end up approving the $500,000 attorneys fees. However, in doing so, Vice Chancellor [Sam] Glasscock echoed many of the concerns animating Chancellor Strines decision in In re Transatlantic and reaffirmed the courts role in scrutinizing fee awards in class settlements, Haims and Beha point out.
Specifically, the court highlighted the risk in any disclosure-only settlement that both the plaintiffs and the defendants have agreed to trivial disclosures as the path of least resistance.
And in the Lone Star State on March 28, the Texas Fourteenth Court of Appeals put its stamp on the issue. In Kazman v. Frontier Oil Corp., the court held that the states Rules of Civil Procedure precluded any fee award as a matter of law under a class settlement that did not provide cash benefits to class members, regardless of the benefit conferred on shareholders by additional disclosures or other relief, Morrison & Foerster reports.
Haims and Beha note that Delaware and Texas have long been popular forums for M&A litigationso plaintiffs attorneys may need to re-think their strategies for corporate deals. [T]aken together, they write, these cases should cause the plaintiffs bar to evaluate more carefully the basis of merger suits and the relief to shareholders that such suits are meant to secure.