The formulaic opening scenes of a post-apocalyptic show are familiar by now: close-up shot of an everyday item, a pair of shoes, perhaps, in the middle of a road. The creaking chains of a playground swing set blowing in the wind seem eerily loud. Now, faster, the camera pans past a row of businesses, a courthouse, a grocery store, all still and uninhabited. Next is an aerial shot of the downtown connector where the cars are abandoned, still running. Later in the TV series, viewers will learn from the small cabal of survivors that the cause of this depopulation is a virus, nuclear event, zombie outbreak, or the reckoning.
This is where we find ourselves with section 14(a) merger and acquisition (M&A) objection class action litigation. In a drama only lawyers could love, our protagonist, an eager securities practitioner, logs on to her computer and checks the Delaware dockets for M&A filings. No hits. Billion-dollar public company merger transactions close without class action lawsuits challenging the pre-combination disclosures. Even the practitioner’s PACER alert for federal M&A filings goes cold. In the distance, a lone securities litigator sighs, waiting for the next emergency injunction hearing at 5 p.m. on the Friday of a holiday weekend. And nothing comes.
In fact, according to NERA Economic Consulting, there were a mere 8 M&A lawsuits filed in 2022, down from 104 just two years prior and a record of 205 in 2017. Similarly, Cornerstone Research tallied only 7 merger objection class actions last year—just 4 percent of the 198 lawsuits Cornerstone identified in 2017 (and less than half the year prior). The practical effect of the disappearance of these M&A lawsuits is that U.S. exchange-listed companies subject to such filings hovers just above zero—at 0.1 percent.
So what event or events led to the mass extinction here? There was a time in the recent past when virtually every public company takeover or combination drew at least one M&A objection lawsuit. In the heyday of M&A litigation, in 2014, 95 percent of deals valued at more than $100 million drew an M&A filing.
It was not caused by a virus or zombie attack; rather, the tide of M&A litigation began to shift after the Delaware courts made known their distaste of this kind of suit in a series of rulings culminating in the 2016 In re Trulia, Inc. Stockholder Litigation decision, in which the court rejected the “disclosure-only” settlement vehicle for resolving most M&A cases at the time. Trulia mandated that disclosures deliver a “plainly material benefit” to stockholders and that the related settlement release be “narrowly circumscribed.”
With Delaware proving less than hospitable, M&A litigation changed shapes, largely shifting to federal courts. Pre-Trulia, an average of 97 percent of merger challenges were brought in state courts, including the Delaware Chancery Court. Following the Trulia decision, by 2018, 92 percent of those lawsuits were filed in federal court.
These lawsuits were also more frequently voluntarily dismissed in exchange for “mootness fee” payments to plaintiffs on the grounds that merely filing the lawsuit prompted increased disclosures that benefited shareholders. By 2018, 63 percent of all M&A cases were mootness fee cases. Many of these settlements bypass judicial scrutiny. Plaintiffs’ attorneys also increasingly opted to file disclosure challenges on behalf of individual shareholders, rather than a class of shareholders, and such challenges do not necessitate judicial approval. Mootness fees are on average much lower than the attorney fees awarded in the disclosure-only settlement context.
Even with these transformations, M&A settlements still spark criticism from the federal bench. For example, in 2019, Judge Durkin of the Northern District of Illinois invoked the court’s equitable powers to scrutinize the voluntary dismissal of six separate suits against Akorn, Inc., in exchange for a mootness fee, after a stockholder sought to intervene and object to the settlement. Despite denying the motion to intervene, the court nonetheless cited its “inherent powers to police potential abuse of the judicial process—and abuse of the class mechanism in particular” to “require plaintiffs’ counsel to demonstrate that the disclosures for which they claim credit [were plainly material]”—i.e., the Trulia standard—and ordered disgorgement of the mootness fee paid.
Where shareholder plaintiffs’ lawyers eschew a quick mootness fee settlement in favor of litigating these M&A cases post-closing, federal judges have found multiple bases to throw the cases out. For one, plaintiffs in M&A cases have to either demonstrate that the challenged proxy statement omitted a fact required to be disclosed by Securities and Exchange Commission regulations or plead with particularity that some omitted fact renders a statement in the proxy materially misleading. In contrast to similar Delaware duty-of-disclosure claims, the mere omission of a material fact is insufficient to sustain a claim. Because of the mandatory stay of discovery under the Private Securities Litigation Reform Act of 1995 (PSLRA) and the lack of a section 220 books and records equivalent under the federal proxy rules, it is difficult to plead facts sufficient to survive a motion to dismiss. In addition, damages are incredibly hard to prove in these M&A cases.
With this history in mind, the punchline is that traditional M&A cases are vanishing. Commentators have various theories for the sudden dearth of once-ubiquitous M&A class actions. One is that the economics no longer support the filings as they used to, given that mootness fees are lower on average than disclosure-only settlements. Moreover, as these lawsuits migrated to federal courts, many defendants began to resist paying mootness fees, opting instead to amend deal disclosures to include additional information and declining to compensate M&A plaintiffs altogether. Federal courts on the whole have been reticent to wade into fee disputes, so plaintiffs find themselves effectively in the tussle without a stick. Some observers have also hypothesized that more than a decade of M&A challenges “educated” companies about the sorts of allegedly inadequate or absent deal disclosures that would draw challenges such that newly announced mergers are just less “objectionable.” Compounding these headwinds for plaintiffs, litigation post-closing to summary judgment or trial in federal court can take years—hardly the quick recovery of the days of yore.
Several legal commentators have floated proposals that might land M&A lawsuits on the extinct species list once and for all. For instance, the defense bar could refuse to settle these lawsuits, arguing that the PSLRA, which governs section 14(a) claims, bars attorney fees when plaintiffs achieve only a nonmonetary recovery. Another proposal would be for defendants to litigate these lawsuits aggressively and enforce the PSLRA’s mandatory sanctions provision for violations of Rule 11 if successful on a motion to dismiss. Alternatively, Congress could specify that there is no private right of action under section 14, which would require plaintiffs to seek state court remedies. Congress could otherwise require court approval of the payment of mootness fees or other supervision of the resolution of M&A cases.
Just as in our apocalypse-adjacent TV programming, we are left with a cliffhanger: Will these M&A cases disappear altogether, or will M&A litigation have a comeback story? Stay tuned for next season.
