In the past two years, the court system has seen a sharp increase in the volume of merger-related class-action lawsuits, particularly (but by no means exclusively) in the Delaware Court of Chancery. See John W. Molka III, Advisen Ltd., Securities Suits Abound in a Harsh 2009: An Advisen Quarterly Report—2009 Review 9–10; John W. Moka III, Advisen Ltd., 2010 a Record Year for Securities Litigation: An Advisen Quarterly Report—2010 Review 3–4 (noting that the number of M&A-related lawsuits filed nationwide increased dramatically from 159 in 2008 to 398 in 2010). The increased case volume has led to unusual behavior by shareholders' and defense counsel alike, particularly in connection with the organization of parallel actions in different jurisdictions and the appointment of lead class counsel.
The Multi-Jurisdictional Litigation Problem
An all-too-familiar pattern emerges following the announcement of the acquisition of a Delaware corporation. Some of the plaintiffs' bar will race to file a class-action lawsuit in the Delaware Court of Chancery. Other plaintiffs' lawyers, many of whom perceive Delaware as less shareholder-friendly and reluctant to award reasonable attorney fees, will either race to a courthouse in the state of the target's headquarters or file actions in federal court asserting the same state-law claims as the other plaintiffs but incorporating a proxy claim under Section 14A of the Securities Exchange Act as a basis for the federal court's jurisdiction. The result is parallel litigation that wastes judicial resources, burdens defendants, and, most importantly, threatens shareholders.
Defending duplicative litigation presents a burden for defendants focused on closing the M&A transaction (which may or may not serve shareholder interests). In each forum, defense counsel may have to appear in person at various court hearings, respond to duplicative discovery requests, and brief substantially similar issues. These duplicate costs generally continue until defendants agree to a litigation schedule with plaintiffs in one forum and the judge in the alternate forum orders a stay. Sometimes, however, judges in the competing jurisdictions will refuse to stand down. For example, when Topps Company, Inc. went private, neither Vice Chancellor Strine nor New York State Justice Cahn would agree to stay his action in favor of the alternate forum. See In re Topps Co. S'holders Litig., 924 A.2d 951 (Del. Ch. 2007); In the Matter of The Topps Co., Inc. S'holders Litig., 2007 N.Y. Misc. LEXIS 8973 (Sup. Ct. NY County 2007). This subjected defendants to litigating in two jurisdictions, risking different interpretations and rulings about their behavior.