What Should We Do About Multijurisdictional Litigation in M&A Deals?

Companies and their investors have been battling over the value of representative shareholder litigation since at least the 1940’s. Investors argue that managerial agency costs are high and that class actions and derivative suits are key shareholder monitoring mechanisms that they can deploy to keep managers in line. Companies believe that representative litigation claims are lawyer-driven, reflecting the agency costs that arise out of contingency fee suits that make the lawyer the real party in interest in these cases. Over the decades, there have been numerous skirmishes between these two sets of actors. Yet, even though one side or the other may temporarily gain the upper hand, the war continues today unabated.

The latest round of this extended fight comes over multijurisdictional deal litigation. Many M&A transactions attract shareholder litigation challenging the fairness of the economic terms of the deal for the target shareholders. Since the end of the financial crisis, however, there has been a documented increase in the number of jurisdictions in which each individual transaction is attacked. The potential for multijurisdictional litigation over a single deal arises because shareholders that wish to challenge the proposed terms of an M&A transaction can, under existing rules of civil procedure, choose to do so either in a state court in the target corporation’s state of incorporation, in a state court in the location of the company’s headquarters (assuming the defendants have the necessary presence in the jurisdiction), or in a federal court in one of those two jurisdictions.

Undoubtedly, there has been a marked increase in multijurisdictional litigation since 2007. At the same time, there has also been a shift in the terms of settlements in shareholder litigation away from an increase in the deal consideration and toward more disclosure-only based settlements. This latter type of settlement is potentially disturbing because while the plaintiffs’ attorneys are awarded attorneys’ fees, the target company investors only receive the uncertain benefit of increased deal disclosures. Some commentators have claimed these are inferior settlements, indicative of a low value lawsuit.

What are the real costs and benefits of multijurisdictional litigation? And what should we do about it, if anything? This article first summarizes what we know about these questions and then offers its own viewpoint on how best to respond to multijurisdictional litigation. On the costs and benefits associated with multijurisdictional litigation, there are again very different views. The defense bar argues that these suits have vastly increased the transactions costs of completing deals without producing any offsetting benefits. Others are skeptical about these claims of enormous costs while also finding benefits to investors from continuing to have a choice of forum. The lack of good empirical data identifying these costs and benefits makes it difficult to resolve the dispute, but I have argued elsewhere that at present it seems the costs are relatively low and not out of line with the benefits.

Where you stand on the costs and benefits of these suits affects what you think needs to be done about them. As a result, the proposals for responding to the uptick in multijurisdictional litigation fall into two distinct groups. On the one side, the defense bar and their academic supporters want to eliminate shareholders’ choice about where to file litigation either by mandating that only the state of incorporation is a proper venue or, alternatively, by vesting the choice of venue with the target company’s board of directors. A corollary aspect of these proposals rests on whether the proponents believe that a bylaw passed solely by the board of directors is sufficient to implement such a change, or whether a shareholder-approved charter amendment is needed.

However, on the other side, there are judges, academics, and investors who believe the current system of judicial comity is appropriate either as it is now or with some tweaks. These advocates see value in the current system of judicial federalism and comity, while at the same time differing over whether a thumb needs to be put on the scale in favor of the state of incorporation or greater coordination among judges in different courts. This Article argues that comity is the best solution for the present, although the final resolution of these issues awaits the development of more complete data on the costs and benefits of the current system.

However, if the real impetus for this debate is a noticeable decline in the quality of the underlying suits challenging M&A transactions, as evidenced by the resultant increase in disclosure-based settlements, then courts in all jurisdictions should respond by denying expedited discovery in, or dismissing outright, weak class actions and derivative suits in this area, particularly those that allege only disclosure violations in arm’s length acquisitions. If all courts would apply these principles in approaching multijurisdictional litigation, without concern for where these cases finally wind up being resolved, there should be little need to change the whole litigation system in ways that may adversely affect all investors.

The full paper is available for download here.