Following nearly every announcement of a public-company acquisition in the US, including take-private acquisitions by private equity investors, plaintiffs’ law firms file class actions on behalf of shareholders.
These actions are usually based on allegations that the target board of directors breached fiduciary duty (for example, that the directors provided inadequate disclosure to shareholders or have a conflict of interest in the proposed acquisition). The plaintiffs’ law firms commonly ask the court to enjoin the target company’s shareholder vote, often to extract a quick settlement. However, settlements in such cases rarely benefit the shareholders who, in return for dropping all future claims against the target and its board of directors, obtain some limited supplemental disclosure and payment of the plaintiff law firms’ over-sized legal fees (the so-called “disclosure only” settlement).
According to Cornerstone Research, plaintiffs’ firms filed lawsuits in connection with 93% of all US public-company M&A deals valued over US$100 million. Almost 80% of the settlements reached in 2014 provided the stockholder class with nothing more than some additional disclosures. This type of litigation occurs much less frequently in Europe, and is particularly rare in the UK.
The Delaware Court of Chancery — the leading court in the US for corporate law cases — has a long history of approving disclosure-only settlements that award plaintiffs’ counsel fees and grant target companies’ boards a broad release of claims by the shareholder class. Chancery Court rulings during the second half of 2015, however, have signaled an end to this practice.
In September 2015, the Chancery Court warned that litigants should no longer expect the court to approve broad releases of target company boards in exchange for additional disclosures, and other recent Chancery Court decisions have echoed this warning.
These recent decisions have signaled a sea change in US M&A litigation, including private equity M&A litigation. As a result, plaintiffs’ law firms may begin to file more lawsuits outside of Delaware, including in federal court, and may choose to proceed with post-closing damages cases rather than attempting to use the preliminary injunction phase to force defendants to settle. The extent to which other US jurisdictions follow the Chancery Court’s lead on this issue remains to be seen. However, companies and private equity firms should no longer expect that US shareholder litigation challenging their M&A transactions will be resolved as easily and rapidly as prior litigation practices reflected.
Unlike in the US, a statutory body, the Panel on Takeovers and Mergers regulates the UK public company M&A regime. The Panel administers the City Code, a rulebook governing takeovers in the UK.
The City Code regulates, among other requirements, the documentation, public statements and associated disclosures for change-of-control transactions relating to companies subject to the City Code.
The Panel has an internal appeals procedure that parties to (or interested parties in) a transaction are expected to use if such parties do not agree with the way a matter has been handled. This process tends to keep transactions out of the court, and shareholder/third party litigation regarding transactions is extremely rare.
However, in those transactions where share consideration is offered, the issuer will generally be required to publish listing particulars or a prospectus. In addition, a company with a premium listing on the London Stock Exchange cannot make significant acquisitions without publishing a shareholder circular. The spread of shareholder activism from the US to Europe has led to speculation that the UK courts will see more collective actions related to misstatements or omissions in these public documents. In a group litigation currently before the High Court of England and Wales, about 5% of Lloyds TSB plc shareholders allege that the circular relating to Lloyds’ acquisition in 2009 of Halifax Bank of Scotland plc (and the then Lloyds directors’ various other communications) contained material misrepresentations and omissions, and the directors were accordingly in breach of tortious and fiduciary duties that they owed to the claimants.
It remains to be seen whether these types of claims will be restricted to public documents produced during the financial crisis in particular, or if we are witnessing the introduction into the UK courts of US-style merger litigation.