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The Shifting Tides of Merger Litigation

50 Pages Posted: 23 Feb 2017 Last revised: 6 Dec 2017

Matthew D. Cain

U.S. Securities and Exchange Commission

Jill E. Fisch

University of Pennsylvania Law School - Institute for Law and Economics

Steven Davidoff Solomon

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

Randall S. Thomas

Vanderbilt University - Law School; European Corporate Governance Institute (ECGI)

Date Written: December 4, 2017

Abstract

In 2015, Delaware made several important changes to its laws concerning merger litigation. These changes, which were made in response to a perception that levels of merger litigation were too high and that a substantial proportion of merger cases were not providing value, raised the bar, making it more difficult for plaintiffs to win a lawsuit challenging a merger and more difficult for plaintiffs’ counsel to collect a fee award.

We study what has happened in the courts in response to these changes. We find that the initial effect of the changes has been to decrease the volume of merger litigation, to increase the number of cases that are dismissed, and to reduce the size of attorneys’ fee awards. At the same time, we document an adaptive response by the plaintiffs’ bar in which cases are being filed in other state courts or in federal court in an effort to escape the application of the new rules.

This responsive adaptation offers important lessons about the entrepreneurial nature of merger litigation and the limited ability of the courts to reduce the potential for litigation abuse. In particular, we find that plaintiffs’ attorneys respond rationally to these changes by shifting their filing patterns, and that defendants respond in kind. We argue, however, that more expansive efforts to shut down merger litigation, such as through the use of fee-shifting bylaws, are premature and create too great a risk of foreclosing beneficial litigation. We also examine Delaware’s dilemma in maintaining a balance between the rights of managers and shareholders in this area.

Keywords: Mergers, acquisitions, M&A, corporations, corporate law, corporate governance, Delaware legislation, merger litigation, plaintiffs’ lawyers, securities litigation, shareholder rights, management rights, empirical study

JEL Classification: G34, K22, K41

Suggested Citation

Cain, Matthew D. and Fisch, Jill E. and Davidoff Solomon, Steven and Thomas, Randall S., The Shifting Tides of Merger Litigation (December 4, 2017). Vanderbilt Law Review, 2018 Forthcoming; U of Penn, Inst for Law & Econ Research Paper No. 17-6; UC Berkeley Public Law Research Paper No. 2922121; Vanderbilt Law Research Paper No. 17-19; European Corporate Governance Institute (ECGI) - Law Working Paper No. 375/2017. Available at SSRN: https://ssrn.com/abstract=2922121

Matthew Cain

U.S. Securities and Exchange Commission ( email )

United States Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549
United States

Jill 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)

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

Randall Thomas

Vanderbilt University - Law School ( email )

131 21st Avenue South
Nashville, TN 37203-1181
United States

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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