Nearly 180 Suits in 18 Months: Pa.'s Most Prolific Securities Filer Exposes New Dynamics of M&A Litigation

The number of mergers and acquisitions reached new heights in recent years, and, if the output of one Philadelphia-based law firm is any indication, so have the number of attorneys filing challenges to those deals.

Since the beginning of 2021, the three-attorney Grabar Law Office has filed more than 175 securities lawsuits in the U.S. District Court for the Eastern District of Pennsylvania raising issues with the various defendant-companies’ merger or acquisition announcements. According to a review of the federal dockets, the lawsuits comprise all of the cases classified in the PACER system as civil securities fraud suits that were filed in all three Pennsylvania federal courts since the start of 2021.

The suits, which have averaged a pace of nearly 10 each month, typically are filed by a rotation of the same few plaintiffs and are withdrawn shortly after they are filed, normally before defense counsel enters an appearance on the docket, according to court records.

While this type of litigation has gone on for years, observers say that these lawsuits give a glimpse into the changing ways the plaintiffs securities bar has sought to leverage recent case law and the active M&A environment.

Frequent Filers

The phenomenon of so-called frequent filers in securities litigation is nothing new. According to attorneys who practice in this area, M&A announcements by companies have long drawn lawsuits claiming that the statements were inadequate and lacked some key piece of information relevant to stockholders.

However, what is new is where these suits are being filed.

According to practitioners, for many years these types of suits were almost exclusively being brought as class action lawsuits in Delaware’s Court of Chancery. Typically, the suits would raise an issue about a press release or proxy statement announcing an impending deal, and then would settle quickly, oftentimes with the company providing an amended statement to the U.S. Securities and Exchange Commission to provide the information the lawsuit alleged was lacking. The cases also typically sought to block the merger from going forward, at least until the additional information is provided.

Counsel for the plaintiff then would seek a fee for their work, citing the amended statement as evidence of a winning result.

“The frequent filing cases are pretty much always in mergers and acquisitions cases because the threat of an injunction is very costly,” University of Michigan School of Law professor Adam Pritchard, who teaches corporate and securities law, said. He noted that employees, customers and suppliers all have stakes in the matter, and if a lot of money is being spent to arrange financing, there’s a lot of interest at stake too. ”The question that’s never answered is: was this information something that would be material for the investors who have to vote to approve the merger?”

However, a little more than five years ago, a decision from Delaware’s Chancery Court took what was a relatively consolidated type of litigation and scattered it across the country.

In the 2016 Chancery Court decision in In re Trulia Stockholder Litigation, then-Chancellor Andre Bouchard said Delaware courts would from then on generally disfavor this type of “disclosure-only” litigation, and advised that settlements resulting only in disclosures—and their attached fee agreements—should not be approved unless the resulting disclosures clearly led to a “plainly material” benefit for the shareholders.

According to securities lawyers, the decision led to a major shift in where the cases were being filed.

“Before 2016, these were usually set up as class actions in Delaware Chancery Court,” Reed Smith’s Herb Kozlov said. “Then strike suit lawyers moved into federal court.”

Results are evident in the most recent report from legal analytics company Lex Machina, which found that securities filings in Delaware have been decreasing in recent years, and increasing elsewhere, especially in the Southern District of New York, which jumped to 969 in 2021 from 560 filings in 2020.

Overall, the number of securities cases in federal court jumped to 2,668 in 2021 from 1,070 in 2016, the report said. And in Pennsylvania, the report said, the Eastern District has seen a big spike in recent years, rising more than 350%, to 142 filed in 2021 from 30 filed in 2019, becoming the seventh-most active federal venue last year for securities litigation.

A review of the Pennsylvania federal docket shows that much of that growth is due to one firm: Grabar Law Office.

Grabar Law Office

According to a search through the Eastern District’s dockets, the Philadelphia-based Grabar Law Office filed 128 suits in 2021, plus an additional 50 since the start of 2022. The law firm’s prolific litigation is a trend first detected by ALM’s case-tracking site, Law.com Radar.

Grabar’s Joshua Grabar did not return several calls and emails seeking comments about the firm’s practice, or the nature of its cases.

The firm only filed one suit in the Eastern District in June and none so far in July, but before then the firm was averaging about 10 new suits each month, court records showed.

“Ten a month is a lot. For sure,” Pritchard said. “Ten a month seems high even by the standards of this business.”

However, speaking generally, Pritchard said, “It doesn’t take a lot of investment to file one of these cases.”

“They tailor a couple of graphs to the facts of this particular merger. If it takes them more than a day to file a complaint, they’re not working very hard,” Pritchard said, speaking broadly.

The suits the Grabar firm has filed raise issues with mergers and acquisitions of companies in a wide range of industries, including pharmaceutical, wealth management and energy companies. Some high-profile defendants include GrubHub, Extended Stay America, Square, Activision Blizzard, Citrix Systems and Spirit Airlines.

Nearly all of the lawsuits were voluntarily dismissed only a few months after they were filed, usually before defense counsel entered an appearance on the docket, according to court records. Many of the firm’s suits were also filed on behalf of the same five people, three of whom were listed in Lex Machina’s most recent report as being in the top 10 most active filers nationwide since 2019.

A review sampling more than a dozen complaints showed that the filings followed a similar structure and used the same language in passages, raising claims under Sections 14(a) and 20(a) of the Securities Exchange Act of 1934. Specifically, the complaints often allege the defendants’ merger statements failed to disclose line items used to calculate certain figures, and that other pieces of information, such as ”inputs and assumptions” and “terminal values” that the financial advisers used to make their determinations, were also lacking.

Complaints also cited missing closing dates, or failures to mention the “timing and details” of any prior services the analysts provided, any potential fees paid to the financial advisers who performed the analyses, as well as any potential conflicts of interest, or potential nondisclosure agreements.

Numerous in-house lawyers at companies on the defense side of one of the firm’s lawsuits did not return messages seeking comment. However, Pritchard said the lawsuits match the “overwhelming profile” of so-called frequent filer cases, which are also called mootness fee suits.

One hallmark of mootness fee cases filed in Delaware, however, has changed as the litigation has bled into federal courts, observers said.

While most of the cases filed in Delaware were class actions, many of the federal actions are now being brought by single plaintiffs. According to Pritchard, that could be because class actions require courts to perform an elevated level of scrutiny to ensure that a class’s best interests are protected, especially when it comes to fee agreements. However, that level of enhanced consideration doesn’t exist for individually filed cases.

Due to the fact that the vast majority of these cases get withdrawn before courts get involved, judges also have very little opportunity to wade into the issue. But in Serion v. Nuance Communications, which did not involve the Grabar firm, U.S. District Judge J. Paul Oetken of the Southern District of New York recently was able to rule on these fee disputes.

Counsel for the plaintiff, who was challenging Microsoft’s planned acquisition of Nuance Communications Inc., had sought $250,000 in fees for their work, but Oetken agreed with the defendants that the issues the plaintiffs raised amounted to “quibbl[ing]” over a financial adviser’s projections, and that much of the disputed information was insubstantial and already publicly available. Ultimately, Oetken rejected the fee request.

Creating ‘Bulletproof’ Transactions

Kozlov at Reed Smith said 2021 was a “remarkable” year for M&A litigation, especially with special purpose acquisition companies and now de-SPAC activity reaching their peak. So it’s reasonable to assume the growth could lead some securities firms to increase the number of suits they’re filing, he said.

For many companies, this type of litigation is seen as a cost of doing business, so the best offense to fend off the claims is to establish a good defense by doing a thorough job when hammering out the deal, Kozlov said.

“There’s always a risk of a plaintiff’s claim, but if you’re going to run the process the right way, then you don’t need to fear a claim,” he said. “The board process is critical; how the board meetings are run, having proper and timely board meeting minutes. All of that goes towards creating a transaction that is bulletproof.”

But even a bulletproof deal can still draw litigation, although it will be easier to make those claims disappear, Kozlov said. Still, for in-house counsel and defense attorneys, there’s often cost-benefit analysis to be done.

“If you’re seeking $50,000 and you’re going to sue me for that, do I want to defend this lawsuit, or negotiate with you?” Kozlov said.

Pritchard and Kozlov agreed that not much can be done absent some legislative changes, although there are no signs of that on the horizon. And even still, challenges are likely to persist, they said.

“The plaintiffs bar is creative,” Kozlov said. “They’re aggressive and when there’s a change in the law, they adapt.”