Private Ordering Post-Trulia

One year ago, in its January 2016 Trulia opinion, the Delaware Court of Chancery announced that nuisance settlements would no longer be welcome in Delaware. A lingering question, however, was whether they would be welcome elsewhere. A year later, the data now suggests that they are. Indeed, merger litigation remains extremely common, and claims are frequently brought in an alternative jurisdiction. The implication, unfortunately, is that Trulia alone is not sufficient to solve the “deal tax” problem.

In Private Ordering Post-Trulia: Why “No Pay” Provisions Can Fix the Deal Tax and Forum Selection Provisions Can’t, I map the evolution of merger litigation post-Trulia. I find that Trulia succeeds inside but fails outside of Delaware. The question thus becomes what more can be done to contain nuisance litigation in the wake of M&A transactions. I focus on private ordering solutions. After exploring the failure of the Exclusive Forum provision to cope with the assessment of the deal tax in alternative fora, I demonstrate how the No Pay provision promises a more effective cure for what ails merger litigation.

Trulia Outside of Delaware

Trulia supplies the Delaware standard for judging the materiality of supplemental disclosures. If the settlement consideration is not “plainly material,” it cannot be approved as fair and reasonable. The question thus becomes whether and how Trulia will be applied by judges in other jurisdictions.

Trulia constitutes controlling authority for settlements involving Delaware companies in state courts outside of Delaware, but a judge can’t apply a case if he or she has never heard of it. Because both parties to the settlement have an interest in having the settlement approved by the judge, neither has any interest in raising Trulia to the out-of-state judge. They may nevertheless have an ethical obligation to do so. ABA Model Rule 3.3(a) (2) states that

“[a] lawyer shall not knowingly … fail to disclose to the tribunal legal authority in the controlling jurisdiction known to the lawyer to be directly adverse to the position of the client and not disclosed by opposing counsel….”

Because Delaware law controls at least with regard to the materiality determination, Trulia should count as “authority in the controlling jurisdiction.”

In my experience, however, forum courts have only been made aware of the Trulia decision where objectors have appeared to raise it. But objectors are rare, and we should therefore not be surprised if judges outside of Delaware continue to rubber stamp settlements.

The Exclusive Forum Option

The Exclusive Forum provision cannot be expected to solve the out-of-Delaware problem because the Exclusive Form provision effectively creates a defense-side option. The provision preserves the optionality of defendants in two ways. First, waiver is expressly contemplated under the terms of the provision, which becomes inapplicable if the corporation consents in writing to another forum. Second and more fundamentally, the provision is not self-enforcing but applies only when asserted by a defendant, typically in the form of a motion to dismiss filed in the alternative forum. If the defendant does not assert the provision, nothing happens. Defendants can effectively waive the provision simply by choosing not to assert it.

It is now clear that the optionality embedded within forum selection bylaws keeps the door open to disclosure settlements, notwithstanding Trulia. There is evidence that companies with forum selection bylaws have chosen not to assert them but rather have settled in alternative jurisdictions. Corporations decry the state of merger litigation and denigrate plaintiffs’ lawyers as hold-up artists. But when given the choice, more often than not, they do not fight. They settle.

No Pay Provisions as a Solution to Merger Litigation

The best way to stop the deal tax is not to force merger litigation into a single jurisdiction, but rather for corporate defendants to precommit not to pay for nuisance settlements. This can be accomplished by means of a No Pay provision. [1]

A No Pay provision would preclude the corporation from paying attorneys’ fees and costs for a specified form of representative litigation. No Pay provisions could be crafted to preclude fees for shareholder litigation generally or narrowed to preclude fees only for class action shareholder litigation or, even more narrowly, only for disclosure settlements. The provision is likely enforceable however broadly or narrowly it is written. The corporate benefit doctrine is a common law doctrine aimed at incentivizing litigation that is beneficial to shareholders. A No Pay provision amounts to shareholders collectively agreeing that because specified forms of litigation provide no meaningful benefit, they will no longer pay for such claims to be brought. The provision is consistent with the Delaware General Corporation Law’s prohibition of fee shifting in bylaw and charter provisions. [2] It does not penalize litigious shareholders by imposing on them the fees and costs of the corporation. It merely forces them to bear their own fees and costs. No Pay provisions are consistent with ATP Tour v. Deutscher Tennis Bund, which suggests broad acceptance of private ordering with regard to attorneys’ fee arrangements. [3] And they have been upheld against shareholder challenge in Maryland state court. [4]

No Pay provisions solve the collective action problem created by corporate defendants’ inconsistent preferences over time. As long as corporations adopt No Pay provisions on a clear day, when they are not subject to deal litigation, they have no incentive to defect from the collective interest in fighting nuisance litigation. Moreover, as long as the commitment is made binding—for example, in the form of a charter provision or, alternatively, in the form of a bylaw term requiring shareholder approval for waiver or amendment—the mere existence of the provision will deter litigation. If plaintiffs’ lawyers cannot be paid for nuisance settlements, they will either stop bringing nuisance claims or, alternatively, abandon them upon concluding that the claims can yield only settlements for which they cannot be paid. Thus, if widely adopted, the No Fee provision has the potential to succeed where the Exclusive Forum provision has failed, by radically reducing or even eliminating the deal tax.

The full paper is available for download here.

Endnotes

1The term was coined by Tom Bayliss and Mark Mixon in the Forum in 2015. A. Thompon Baylis & Mark Mixon, “No Pay” Provisions: The Forgotten Middle Ground in the Fee-Shifting Battle. I made a similar argument, suggesting that companies opt-out of the “corporate benefit” doctrine, at approximately the same time. See Sean J. Griffith, Correcting Corporate Benefit: How to Fix Shareholder Litigation by Shifting the Doctrine on Fees, 56 Boston College Law Review 1 (2015).(go back)

2Delaware General Corporation Law §§ 102(f), and 109(b). See also Solak v. Paylocity Holding Corporation, C.A. No. 12299-CB, Dec. 27, 2016 (holding that a fee shifting bylaw adopted to apply only to extra-forum litigation filed and maintained in contravention to an exclusive forum provision nevertheless violated the ban on fee shifting provisions in 109(b)).(go back)

391 A.3d 554 (Del. 2014).(go back)

4Katz v. Commonwealth REIT, No. 24-C-13-001299, slip op. (Md. Cir. Ct. Feb. 19, 2014).(go back)