The Plaintiffs' Lawyer's Transaction Tax: The New Cost of Doing Business in Public Company Deals

Abstract

This article addresses the proliferation of frivolous litigation in the context of public company deals. In 2012 93% of public company mergers and acquisitions valued at over $100 million and 96% of such transactions valued over $500 million incurred litigation. Through these “merger objection suits,” plaintiffs’ attorneys have successfully attached a transaction tax – in the form of attorneys’ fees – as the cost of doing business for public company mergers and acquisitions. Armed with the knowledge that time is of the essence in these transactions, plaintiffs’ attorneys understand the leverage they have to force a quick settlement with a defendant company’s board. Adding to the attorneys’ leverage and the pressure on defendants to settle is the threat of larger-than-normal litigation costs since most large public company deals that attract litigation incur more than one suit, often in several different jurisdictions. When given the choice of either paying plaintiffs’ attorneys’ fees – particularly when the settlement is typically otherwise non-monetary – or jeopardizing a multi-million dollar transaction, boards of defendant companies seem, understandably, eager to choose the former.

This article explores the reasons for the increasing overabundance of merger objection litigation and the solutions that have been proposed or adopted to address it. Previous scholarship in this area has focused on the need to eliminate the multi-jurisdictional aspect of this litigation by funneling all such cases to the state of the target’s incorporation or otherwise easing the consolidation of cases across jurisdictions. Eliminating the multi-jurisdictional aspect of merger litigation would, no doubt, be a step toward curbing abusive strike suits in this arena by alleviating some of the settlement pressure imposed on defendants by the high costs of litigating a case in multiple forums. However, the other incentives to settle, particularly those imposed by the pressure of the deal timeline, would remain. As such, this article suggests that, in addition to funneling merger objection suits to the state of incorporation of the target, there need to be state solutions, beginning with Delaware, to further deter strike suits in this area. This article describes a combination of legislative reform and enhanced oversight of merger objection settlements by the Delaware Chancery Court as a possible solution to the merger objection litigation problem.

Keywords: merger, merger objection, entrepreneurial litigation, strike suit