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

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

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

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

Who Are the Top Law Firms? Assessing the Value of Plaintiffs\u27 Law Firms in Merger Litigation

Using a hand-collected sample of 1,739 class actions that challenge the fairness of M&A transactions from the period 2003 through 2012, we examine the effectiveness of plaintiffs’ law firms. From out of the 336 law firms in our sample, we determine the top law firms based on their popularity with informed plaintiffs as well as their proven ability to obtain large attorneys’ fees awards. We find that the presence of a top plaintiffs’ law firm is significantly and positively associated with a higher probability of lawsuit success. These results hold even after instrumenting for unobserved case quality, given that top law firms likely can obtain better cases with higher chances of success. This success appears to stem from the fact that top plaintiffs’ law firms are significantly more active in prosecuting cases than other plaintiffs’ law firms: they file more documents in the cases they litigate and they are more likely to bring injunction motions to enjoin a transaction. Defendants are also less likely to file a motion to dismiss cases filed by top plaintiffs’ law firms. Our results inform the debate over shareholder litigation as well as provide courts guidance for selecting lead counsel in shareholder class action litigation

Mootness Fees

In response to a sharp increase in litigation challenging mergers, the Delaware Chancery Court issued the 2016 Trulia decision, which substantively reduced the attractiveness of Delaware as a forum for these suits. In this Article, we empirically assess the response of plaintiffs\u27attorneys to these developments. Specifically, we document a troubling trend-the flight of merger litigation to federal court where these cases are overwhelmingly resolved through voluntary dismissals that provide no benefit to the plaintiff class but generate a payment to plaintiffs\u27counsel in the form of a mootness fee. In 2018, for example, 77% of deals with litigation were challenged in federal court, and in 63% of litigated cases, plaintiffs\u27 attorneys received a mootness fee. This compares with 2014, when only 4% of deals with litigation had a filing in federal court and no mootness fees were awarded. The rise of the mootness fee and the shift to federal court raise several issues, including a lack of transparency in the quality and resolution of merger cases and an increased potential for blackmail litigation. These problems are compounded by the willingness of some courts to permit the payment of a mootness fee in connection with corrective disclosures that are immaterial but possibly helpful, a standard that we argue is unworkable and increases the potential for vexatious litigation. We argue that the widespread payment of mootness fees reflects an inappropriate tax on the judicial system and corporations

The Shifting Tides of Merger Litigation

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\u27 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\u27 fee awards. At the same time, we document an adaptive response by the plaintiffs\u27 bar. Merger cases are being filed in other state courts or in federal court, presumably in an effort to escape the application of the new Delaware 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\u27 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\u27s dilemma in maintaining a balance between the rights of managers and shareholders in this area

Mootness Fees

In response to a sharp increase in litigation challenging mergers, the Delaware Chancery Court issued the 2016 Trulia decision, which substantively reduced the attractiveness of Delaware as a forum for these suits. In this Article, we empirically assess the response of plaintiffs’ attorneys to these developments. Specifically, we document a troubling trend—the flight of merger litigation to federal court where these cases are overwhelmingly resolved through voluntary dismissals that provide no benefit to the plaintiff class but generate a payment to plaintiffs’ counsel in the form of a mootness fee. In 2018, for example, 77% of deals with litigation were challenged in federal court, and in 63% of litigated cases, plaintiffs’ attorneys received a mootness fee. This compares with 2014, when only 4% of deals with litigation had a filing in federal court and no mootness fees were awarded. The rise of the mootness fee and the shift to federal court raise several issues, including a lack of transparency in the quality and resolution of merger cases and an increased potential for blackmail litigation. These problems are compounded by the willingness of some courts to permit the payment of a mootness fee in connection with corrective disclosures that are immaterial but possibly helpful, a standard that we argue is unworkable and increases the potential for vexatious litigation. We argue that the widespread payment of mootness fees reflects an inappropriate tax on the judicial system and corporations. Although we argue that a shift to federal courts is appropriate for litigation challenging the adequacy of merger disclosure, we maintain that a successful shift requires the federal courts to police the quality and resolution of merger litigation carefully. We conclude that federal courts should require that the payment of mootness fees be subject to judicial review. We further argue that the payment of a mootness fee should be conditioned on litigation resulting in a material corrective disclosure—the same legal standard required by Trulia. We propose that the Federal Rules of Civil Procedure be amended to implement these requirements or alternatively that federal judges use their inherent authority to adopt these requirements. We ultimately view these changes as necessary to limit frivolous litigation and provide for transparency and judicial oversight of the litigation process

Does Revlon Matter? A Empirical and Theoretical Study

We empirically examine whether and how the doctrine of enhanced judicial scrutiny that emerged from Revlon and its progeny actually affects M&A transactions. Combining hand-coding and machine-learning techniques, we assemble data from the proxy statements of publicly announced mergers between 2003 and 2017 into a dataset of 1,913 unique transactions. Of these, 1,167 transactions were subject to the Revlon standard, and 553 were not. After subjecting this sample to empirical analysis, our results show that Revlon does indeed matter for companies incorporated in Delaware. We find that in Delaware, Revlon deals are more intensely negotiated, involve more bidders, and result in higher transaction premiums than non-Revlon deals. However, these results do not hold for target companies incorporated in other jurisdictions that have adopted the Revlon doctrine. Our results shed light on the implications of the current state of uncertainty surrounding Revlon and provide some direction for courts going forward. We theorize that Revlon is a monitoring standard whose effectiveness depends upon the judiciary’s credible commitment to intervene in biased transactions. The precise contours of the doctrine are unimportant as long as the judiciary retains a substantive avenue for intervention. Recent Delaware decisions in C&J and Corwin have been criticized for overly restricting Revlon, but we suggest that such concerns are overstated so long as Delaware judges continue to monitor the substance of transactions. Thus, in applying these decisions, Delaware judges should focus not on procedural aspects but the substantive component of transactions, which Revlon initially sought to regulate

The Shifting Tides of Merger Litigation

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\u27 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\u27 fee awards. At the same time, we document an adaptive response by the plaintiffs\u27 bar. Merger cases are being filed in other state courts or in federal court, presumably in an effort to escape the application of the new Delaware 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\u27 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\u27s dilemma in maintaining a balance between the rights of managers and shareholders in this area

The Myth of \u3ci\u3eMorrison\u3c/i\u3e: Securities Fraud Litigation Against Foreign Issuers

Using a sample of 388 securities fraud lawsuits filed between 2002 and 2017 against foreign issuers, we examine the effect of the Supreme Court\u27s decision in Morrison v. National Australia Bank Ltd. We find that the description of Morrison as a steamroller, substantially ending litigation against foreign issuers, is a myth. Instead, we find that Morrison did not significantly change the type of litigation brought against foreign issuers, which, both before and after this case, focused on foreign issuers with a U.S. listing and substantial U.S. trading volume. Although dismissal rates rose post-Morrison, we find no evidence that this was related to the decision. Settlement amounts and attorneys\u27 fees remained unchanged post-Morrison. We use these findings to theorize that Morrison was primarily a preemptive decision about standing that firmly delineated the exposure of foreign issuers to U.S. liability in response to the Vivendi case, which sought to expand the scope of liability for foreign issuers whose shares traded primarily in non-U.S. venues. When Morrison is placed in its true context, it is justified as a decision in line with administrative and court actions that have historically aligned firms\u27 U.S. liability to be proportional to their U.S. presence. Although Morrison had this defining effect, it did not change the litigation environment for foreign issuers, which was the oft-cited import of the decision. More generally, our analysis of Morrison underscores how the decision has been mistakenly characterized as a case primarily about extraterritoriality rather than standing

Valsartan for attenuating disease evolution in early sarcomeric hypertrophic cardiomyopathy: the design of the Valsartan for Attenuating Disease Evolution in Early Sarcomeric Hypertrophic Cardiomyopathy (VANISH) trial

Background: Hypertrophic cardiomyopathy (HCM) is often caused by sarcomere gene mutations, resulting in left ventricular hypertrophy (LVH), myocardial fibrosis, and increased risk of sudden cardiac death and heart failure. Studies in mouse models of sarcomeric HCM demonstrated that early treatment with an angiotensin receptor blocker (ARB) reduced development of LVH and fibrosis. In contrast, prior human studies using ARBs for HCM have targeted heterogeneous adult cohorts with well-established disease. The VANISH trial is testing the safety and feasibility of disease-modifying therapy with an ARB in genotyped HCM patients with early disease. Methods: A randomized, placebo-controlled, double-blind clinical trial is being conducted in sarcomere mutation carriers, 8 to 45 years old, with HCM and no/minimal symptoms, or those with early phenotypic manifestations but no LVH. Participants are randomly assigned to receive valsartan 80 to 320 mg daily (depending on age and weight) or placebo. The primary endpoint is a composite of 9 z-scores in domains representing myocardial injury/hemodynamic stress, cardiac morphology, and function. Total z-scores reflecting change from baseline to final visits will be compared between treatment groups. Secondary endpoints will assess the impact of treatment on mutation carriers without LVH, and analyze the influence of age, sex, and genotype. Conclusions: The VANISH trial is testing a new strategy of disease modification for treating sarcomere mutation carriers with early HCM, and those at risk for its development. In addition, further insight into disease mechanisms, response to therapy, and phenotypic evolution will be gained