On Monday, Time Warner filed a disclosure at the Securities and Exchange Commission of its $85 billion merger agreement with AT&T. The SEC filing includes a provision notifying investors that Time Warner amended its bylaws over the weekend to direct all shareholder litigation to Delaware Chancery Court.
That forum selection clause, as such provisions are known, is a very good way to restrict scrutiny of the $85 billion deal by the plaintiffs’ bar.
Shareholder lawyers I talked to Monday about the Time Warner deal – and the other just-announced mergers buoying the stock market – seemed almost wistful about how difficult it has become to litigate M&A class actions in Delaware Chancery Court.
You can be sure some investor will file a class action challenging AT&T’s takeover of Time Warner. As Fordham law professor Sean Griffith told me Monday, Time Warner’s decision to reach a deal with AT&T without seeking competing bids is an open invitation for plaintiffs’ lawyers to argue that shareholders aren’t getting a fair price.
But according to three top-notch plaintiffs’ lawyers who talked to me on background, a series of recent decisions from the Delaware Supreme Court and Chancery Court has made it much tougher for investors to police corporate boards and advisers, to block shareholder votes on deals involving a single bidder and to recover damages for disclosure violations if shareholders have voted in favor of a merger.
The net effect of this recent precedent, they said, is to encourage shareholders to file M&A class actions in federal court, alleging violations of federal disclosure laws, rather than bringing fiduciary duty suits in Delaware.
These lawyers weren’t even talking about Chancery Court’s celebrated 2015 crackdown on “deal tax” settlements. You probably remember that Delaware judges acted in concert to squelch M&A class action settlements in which corporations received broad releases from shareholder claims in exchange for additional, often immaterial, proxy disclosures.
Chancery Court’s refusal to sign off on six- or seven-figure fees for plaintiffs’ lawyers who negotiated disclosure-only settlements has already sharply reduced the number of M&A challenges filed in Delaware.
According to a Cornerstone Research study published this summer, nearly two-thirds of all deals valued at more than $100 million still provoked shareholder litigation, but that’s way down from the 2013 peak of 94 percent – and shareholder lawyers are much more likely to file investor suits outside of Delaware. (Thus explaining Time Warner’s new forum selection clause.)
MORE SHAREHOLDER ROADBLOCKS
For all of the attention paid to the clampdown on disclosure-only settlements, the Delaware Supreme Court’s 2015 opinion in Corwin v. KKR may turn out to have been a more important disincentive for shareholder lawyers to sue in Chancery Court.
In the Corwin decision, written by Chief Justice Leo Strine, the state supreme court held that if a deal is approved by “fully informed, uncoerced” shareholders, the board’s actions during the sale process should be reviewed under the extremely forgiving business judgment standard.
Effectively, the Corwin ruling spelled the end of post-closing damages claims in deals shareholders voted to approve.
In a much-discussed decision earlier this month, for example, Vice-Chancellor Joseph Slights dismissed a shareholder class action against board members of OM Group, a specialty chemical company bought out by the private equity firm Apollo in 2015.
Plaintiffs alleged the board sold the company on the cheap to avoid the “embarrassment and aggravation” of agitation by an activist investor, ignoring the advice of OM’s own financial adviser, who said shareholders would obtain maximum value if the company were broken up and sold in pieces.
The judge said that however “disquieting” the allegations, plaintiffs failed to allege that the board withheld material information from shareholders, 89 percent of whom voted in favor of the buyout. Under Corwin, Vice-Chancellor Slights found, OM directors are in the clear.
In another interpretation of Corwin, Chancellor Andre Bouchard in August dismissed post-closing breach-of-duty claims against board members of C&J Energy Services, acquired by Nabors Industries in 2015.
The plaintiffs alleged that C&J didn’t disclose a competing bid (among other supposed disclosure failures) so shareholders were not actually informed at the time they voted to approve the deal. The chancellor held plaintiffs waited too long to allege the disclosure violations, which they should have raised before the shareholder vote.
The message to plaintiffs’ lawyers, in other words, is that the only way to win an M&A challenge in Delaware is to come up with evidence of serious disclosure violations in a short time frame.
But plaintiffs’ lawyers say Chancery Court judges are simultaneously tightening the standard for expedited discovery in M&A cases, stripping them of the tools to obtain that evidence.
SEE YOU IN FEDERAL COURT
The answer, they say, may be to stop litigating M&A challenges as fiduciary duty cases in Delaware and instead start asserting violations of federal securities law, which, after all, prohibits corporations from making false or misleading proxy filings.
Cornerstone’s study this summer detected an early move for M&A class actions from Delaware to federal court. Decisions like C&J Energy and OM Group will probably hasten that move.
So look for shareholders to sue Time Warner in federal court, and to argue that a class action asserting only a cause of action under federal law is not subject to the company’s forum selection clause.