Confronting the Peppercorn Settlement in Merger Litigation: An Empirical Analysis and a Proposal for Reform

68 Pages Posted: 18 Feb 2014 Last revised: 3 Mar 2015

Jill E. Fisch

University of Pennsylvania Law School - Institute for Law and Economics

Sean J. Griffith

Fordham University School of Law

Steven Davidoff Solomon

University of California, Berkeley - School of Law; University of California, Berkeley - Berkeley Center for Law, Business and the Economy

Date Written: 2015

Abstract

Shareholder litigation challenging corporate mergers is ubiquitous, with the likelihood of a shareholder suit exceeding 90%. The value of this litigation, however, is questionable. The vast majority of merger cases settle for nothing more than supplemental disclosures in the merger proxy statement. The attorneys that bring these lawsuits are compensated for their efforts with a court-awarded fee. This leads critics to charge that merger litigation benefits only the lawyers who bring the claims, not the shareholders they represent. In response, defenders of merger litigation argue that the lawsuits serve a useful oversight function and that the improved disclosures that result are beneficial to shareholders.

This Article offers a new approach to assessing the value of these claims by empirically testing the relationship between merger litigation and shareholder voting on the merger. If the supplemental disclosures produced by the settlement of merger litigation are valuable, they should affect shareholder voting behavior. Specifically, supplemental disclosures that are, in effect, “compelled” by settlement should produce new and unfavorable information about the merger and lead to a lower percentage of shares voted in favor of it. Applying this hypothesis to a hand-collected sample of 453 large public company mergers from 2005-2012, we find no such effect. We find no significant evidence that disclosure-only settlements affect shareholder voting.

These findings warrant a reconsideration of Delaware merger law. Specifically, under current law, supplemental disclosures are viewed by courts as providing a substantial benefit to the shareholder class. In turn, this substantial benefit entitles the plaintiffs’ lawyers to an award of attorneys’ fees. Our evidence suggests that this legal analysis is misguided and that supplemental disclosures do not in fact constitute a substantial benefit. As a result, and in light of the substantial costs generated by public company merger litigation, we argue that courts should reject disclosure settlements as a basis for attorney fee awards.

Our approach responds to critiques of merger litigation as excessive and frivolous by reducing the incentive for plaintiffs’ lawyers to bring weak cases, but it would have an additional benefit. Current practice drags state court judges into the task of indirectly promulgating disclosure standards in connection with the approval of fee awards. We argue, instead, for a more efficient specialization between state and federal courts in the regulation of mergers: public company merger disclosure should be policed by the federal securities laws while state corporate law focuses on substantive fairness.

Keywords: Mergers and acquisitions, M&A, law and economics, empirical legal studies, legal profession, legal fees, federal securities law, state corporation law, Delaware corporation law, corporate governance, publicly traded companies, deal litigation, non-pecuniary relief, federalism, jurisdiction

JEL Classification: G18, G34, G38, K22, K41

Suggested Citation

Fisch, Jill E. and Griffith, Sean J. and Davidoff Solomon, Steven, Confronting the Peppercorn Settlement in Merger Litigation: An Empirical Analysis and a Proposal for Reform (2015). Texas Law Review, Vol. 93, P. 557, 2015; U of Penn, Inst for Law & Econ Research Paper No. 14-4. Available at SSRN: https://ssrn.com/abstract=2398023 or http://dx.doi.org/10.2139/ssrn.2398023

Jill E. Fisch (Contact Author)

University of Pennsylvania Law School - Institute for Law and Economics ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States
215-746-3454 (Phone)
215-573-2025 (Fax)

Sean J. Griffith

Fordham University School of Law ( email )

150 West 62nd Street
New York, NY 10023
United States

Steven Davidoff Solomon

University of California, Berkeley - School of Law ( email )

215 Boalt Hall
Berkeley, CA 94720-7200
United States

University of California, Berkeley - Berkeley Center for Law, Business and the Economy ( email )

Berkeley, CA 94720-7200

Paper statistics

Downloads
669
Rank
30,138
Abstract Views
4,843