Solving the mystery of the vanishing M&A shareholder class action

6 minute read

The seal of the Court of Chancery for the State of Delaware in the Sussex County Court of Chancery in Georgetown, Delaware, June 9, 2021. REUTERS/Andrew Kelly

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(Reuters) - Shareholders just aren’t filing class actions challenging M&A deals like they used to.

Cornerstone Research and NERA Economic Consulting have both issued their annual reports on last year's securities class action litigation. NERA examines only class actions filed in federal court, while Cornerstone includes state-court class actions as well, but both groups reported a big drop in overall filings between 2020 and 2021 – from more than 300 class actions in 2020 to barely more than 200 in 2021.

The biggest decline, according to both NERA and Cornerstone, came in the category of class actions by shareholders objecting to announced M&A deals. NERA reported that only 14 M&A class actions were filed in 2021, down from 103 in 2020 and a high of 205 in 2017. Cornerstone identified 18 merger objection class actions in 2021, less than a tenth of the 198 cases Cornerstone identified in 2017. NERA tabulated the year-to-year drop in M&A class action filings to be 85%. Cornerstone’s number was 82%. Either way, the drop is precipitous.

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You don’t have to look too far back in time to remember when M&A objection class actions were ubiquitous, with plaintiffs' lawyers chasing every announced merger as relentlessly as seagulls diving for French fries at a beachside café. These class actions were a bonanza for shareholder lawyers, who were routinely awarded hundreds of thousands of dollars even in cases where their only achievement for shareholders was beefed-up proxy disclosures.

Then, in late 2015 and early 2016, Delaware famously cracked down on fees for plaintiffs' lawyers in disclosure-only M&A class actions. M&A challenges migrated to federal court, where shareholders added allegations of federal proxy reporting violations. By 2017, as both NERA and Cornerstone noted at the time, M&A class actions were being filed by the hundreds in federal court.

Even before last year’s plunge, that practice was evolving, with many plaintiffs' lawyers opting to file disclosure challenges on behalf of individual shareholders, rather than subjecting themselves to judicial scrutiny by bringing cases as class actions. Individual M&A disclosure suits were more easily resolved than class actions: Defendants would agree to make some additional proxy disclosures and plaintiffs' lawyers would dismiss the individual shareholder’s suit, typically in exchange for a mootness fee. Professor Jill Fisch of the University of Pennsylvania Carey Law School and several co-authors documented the phenomenon in a perceptive 2019 Vanderbilt Law Review article, Mootness Fees.

I told you last May that a small coterie of plaintiffs' firms had adapted the mootness fee strategy to impose a de facto "deal tax" on acquisitions by special purpose acquisition companies, or SPACs. Some shareholders and their lawyers, meanwhile, continue routinely to file individual M&A challenges in federal court. A prolific shareholder plaintiff named Stephen Bushansky, for instance, filed nearly two dozen individual M&A objection lawsuits in federal court in 2021. (I emailed one of Bushansky’s regular lawyers, Mark Smilow of WeissLaw, but he didn’t respond.)

NERA and Cornerstone track class actions, not individual shareholder suits, so it's possible that more plaintiffs' lawyers are simply filing individual suits instead of class actions. That might explain, at least in part, the plunging number of merger-objection class actions. On the other hand, shareholder lawyers have known for years that individual shareholder suits were an alternative to class actions -- yet they still filed about 100 M&A class actions in federal court as recently as 2020.

So why do the cases now seem to be on a fast-track to extinction?

The simplest answer, according to a plaintiffs' lawyer who used to bring M&A objection cases but no longer does, is money. (He requested anonymity to speak frankly about this practice area.) Even after Delaware’s crackdown, when M&A class action challenges first moved to federal court, plaintiffs could still reap five- or six-figure fees for obtaining beefed-up disclosures, this lawyer said. But then defendants began to balk at paying mootness fees. Targets and acquirers would amend filings to include additional disclosures but wouldn’t pay shareholder lawyers for their efforts. And federal judges, according to this plaintiffs' lawyer, weren’t eager to jump into these fee disputes. So shareholder lawyers found themselves without leverage.

“It just doesn’t pay anymore,” the lawyer said.

I also reached out to two of the shareholders' lawyers who filed the lion’s share of M&A class actions in federal court in 2020, Seth Rigrodsky of Rigrodsky Law and Richard Maniskas of RM Law to get their take on the reason for the decline. Neither got back to me.

Penn law professor Fisch offered an additional explanation for the decline in M&A class actions: Deal lawyers and their clients have cleaned up some of the problems that shareholders cited in the heyday of these cases. “There’s less need for litigation to refine deals,” Fisch said. That may be particularly true, she said in a booming stock market like 2021’s. Deal prices were high, Fisch said, so it was tougher for shareholders to file class actions alleging that companies were undersold.

Where things could get interesting, according to Fisch, is in another finding in both the NERA and Cornerstone reports. Shareholder lawyers are filing class actions over SPAC transactions. NERA identified 24 SPAC class actions filed in federal court in 2021. Cornerstone, which also covers state court, found 32 SPAC class actions.

In a major ruling last month, Delaware Chancery Court judge Lori Will held that a shareholder class may proceed with direct claims against SPAC insiders who allegedly deceived investors about the prospects of the target company the SPAC sought to acquire. That ruling, in In re Multiplan Corp. Stockholders Litigation, knocks down a lot of the potential obstacles for shareholders in SPAC class actions.

Fisch predicted that shareholders' lawyers will file class actions targeting the same structural concerns that regulators have expressed about SPACs.

“Those are the cases we should be paying attention to,” the Penn professor said. “A lot of real lawsuits are going to migrate to this area.”

Read more:

Delaware Chancery Court opens door to liability for SPAC sponsors

The new ‘deal tax’: SPAC defendants are paying plaintiffs lawyers to drop N.Y. state suits

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Alison Frankel has covered high-stakes commercial litigation as a columnist for Reuters since 2011. A Dartmouth college graduate, she has worked as a journalist in New York covering the legal industry and the law for more than three decades. Before joining Reuters, she was a writer and editor at The American Lawyer. Frankel is the author of Double Eagle: The Epic Story of the World’s Most Valuable Coin.