INTRODUCTION I. THE RISE OF MULTIJURISDICTIONAL M&A LITIGATION A. Background B. Explanations for the Rise of Multijurisdictional M&A Litigation II. NEGATIVE CONSEQUENCES OF MULTIJURISDICTIONAL M&A LITIGATION A. Increased Litigation Expense B. Wasted Judicial Resources C. The Specter of Conflicting Rulings and Collusive Settlements D. The Impact on D&O Insurance III. FLAWED SOLUTIONS TO THE PROBLEM OF MULTIJURISDICTIONAL M&A LITIGATION A. Exclusive Forum Provisions 1. Enforceability of Exclusive Forum Provisions 2. Exclusive Forum Provisions Provide a Sub-Optimal Solution B. Amendment of SLUSA and CAFA C. Judicial Comity D. One-Forum Motions E. First-Filed Rule and Forum Non Conveniens F. State of Incorporation Rule or Legislation G. Scrutiny of Attorneys ' Fees IV. A BETTER SOLUTION--AMENDMENT OF 28 U.S.C. [section] 1407 CONCLUSION INTRODUCTION
This Article examines the seemingly intractable problem of multijurisdictional merger and acquisition (M&A) litigation. Virtually all M&A transactions result in litigation and more than 60% of deals generate suits in multiple courts. Currently there is no procedural mechanism to consolidate these duplicative suits, which increase litigation costs, waste judicial resources, raise the specter of inconsistent rulings and collusive settlements, and increase premiums for directors' and officers' insurance. This Article concludes that the optimal solution to the problem is amending 28 U.S.C. [section] 1407 to provide the Judicial Panel on Multidistrict Litigation (JPML) with authority to transfer civil litigation that is pending in different states to a single state for both pretrial management and trial by a single state court. That statute currently provides only for the transfer of civil actions that are pending in different federal districts. It does not permit transfers of state court suits from one state to another, and neither does any other statute.
The growing phenomenon of multijurisdictional M&A litigation has been well-documented. In 1999-2000, 11.9% of announced M&A offers with a value of at least $80 million generated litigation. (1) In 2005, approximately 39.3% of deals with a minimum value of $100 million attracted a lawsuit. (2) In 2013, shareholders challenged 97.5% of all M&A transactions with a value greater than $100 million involving U.S. public company targets. (3) This was the fourth consecutive year in which more than 90% of all deals this size generated litigation. (4) Shareholders challenge virtually all mergers announced, regardless of whether they are friendly or hostile, or whether the target company's board of directors accepted or rejected the proposed acquisition. (5) Likewise, most leveraged buyouts (LBOs) are subject to judicial challenge. (6)
Many transactions generate multiple lawsuits in multiple jurisdictions. In 2013, there were an average of 6.9 lawsuits per transaction for deals valued at more than $100 million. (7) Very often, when a transaction generates multiple lawsuits, the suits are filed in multiple jurisdictions. Of the 2013 deals, 62% were litigated in more than one court (8) and 40.6% were litigated in more than one state. (9) Multijurisdictional litigation is possible because shareholders who wish to challenge an M&A transaction's proposed terms can choose to do so in a state court in the target corporation's state of incorporation (typically Delaware), (10) in a state court where the target has its principal place of business (often California, Texas, or New York), (11) or in a federal court in one of those two jurisdictions. (12) The vast majority of M&A lawsuits involve corporations incorporated in Delaware but headquartered elsewhere. (13) This problem of multijurisdictional litigation is not unique to M&A deals (14) but is particularly acute in that domain.
M&A lawsuits can be filed as class actions, derivative suits, or individual actions by the bidder, the target company, or a shareholder. In typical deal litigation, the plaintiff shareholder on behalf of a class or derivatively on behalf of the corporation (or both) (15) alleges that the board of directors of the target company violated its fiduciary duties of loyalty, care, good faith, and fair dealing by conducting a flawed sales process that failed to maximize shareholder value. (16) Virtually all M&A suits also allege that the proxy disclosures which set forth information concerning the board's decision-making process, financial projections, and fairness opinions were inadequate, thereby depriving shareholders of the ability to make informed voting decisions. (17) In most cases the shareholders name the acquirer as a co-defendant for aiding and abetting the target's misconduct. (18)
Merger litigation can have genuine value--in part by financing litigation against larger flawed deals that should be challenged. Shareholder litigation also provides a policing effect, as the threat of litigation may encourage greater transparency and fairness in deal-making. (19) Merger offers potentially subject to shareholder litigation also provide a positive expected gain to target shareholders. Recent research indicates that whereas M&A offers subject to lawsuits are completed at a significantly lower rate than offers that are not subject to objection, litigation significantly increases the takeover premium in deals that are completed, and the expected rise in the deal premium more than offsets the fall in the probability of deal completion. (20)
Merger litigation may yield tangible benefits, but many scholars, jurists, and other observers agree that most of this litigation is meritless (21) and multijurisdictional M&A litigation is highly undesirable. M&A litigation burdens companies and their shareholders by increasing expenses, (22) wasting scarce judicial resources, (23) and multiplying the danger of inconsistent rulings and collusive settlements. (24) In insurance terms, M&A litigation has become a high frequency risk, (25) with potential collateral consequences such as escalating pricing for directors' and officers' insurance, particularly at the primary level. (26)
Various solutions have been proposed. This Article critiques the most common suggestions, and then proposes the most logical remedy: amending 28 U.S.C. [section] 1407 to provide the JPML with authority to transfer civil litigation that is pending in different states to a single state for pretrial management and trial by a single state court. (27) To do so, this Article proceeds in four parts. Part I examines the recent sharp increase in multijurisdictional M&A litigation and the reasons for it. Part II examines the negative impact of such litigation. Part III analyzes the advantages and disadvantages of the most common proposals to solve the problem. These proposals include: (a) adoption by bylaw or charter amendment of exclusive forum provisions requiring shareholders to file stockholder class actions and derivative suits in the defendant company's state of incorporation, thereby designating the Delaware Court of Chancery as the exclusive venue for such litigation in most cases; (b) congressional amendment of the Securities Litigation Uniform Standards Act's (SLUSA) (28) Delaware carve-out (29) and the Class Action Fairness Act's (CAFA) parallel provision, (30) requiring shareholders to file class actions under the carve-outs (and shareholder derivative actions with similar effect) only in the courts of the defendant company's state of incorporation; (c) increased cooperation and comity between state court judges of different states; (d) greater use of one-forum motions; (e) stricter enforcement of the first-filed rule and increased use of the doctrine of forum non conveniens; (f) court adoption of a rule, or congressional enactment of a statute, requiring all merger-related securities litigation to be brought in the state of incorporation of the target company; and (g) enhanced scrutiny of attorneys' fees in M&A litigation. As discussed below, all of the foregoing proposals suffer from serious defects that render them unsatisfactory.
Part IV proposes granting the JPML authority to transfer multijurisdictional M&A litigation to a single state for pretrial management and trial by a single state court. This authority would be granted by amendment of 28 U.S.C. [section] 1407, providing the JPML with authority to transfer civil litigation that is pending in different states, and that involves one or more common questions of fact, to a single state court, subject to certain criteria. With respect to M&A litigation, this Article proposes to limit such transfer authority to deals valued at more than $100 million involving publicly traded companies with an offering price of at least $5 per share. This proposal does not contemplate granting the JPML authority to transfer state cases to federal court.
Currently, the JPML has no authority over state court litigation. (31) As a general rule no state court has the authority to transfer litigation to a court in another state or to federal court, (32) and no state court has the authority to accept litigation transferred by a court of another state or federal court. (33) Even though highly desirable, no mechanism exists to transfer a case from a state court in one state to a state court in another state. Amending 28 U.S.C. [section] 1407 to authorize the JPML to make such transfers is the optimal path. Authorizing the JPML to transfer M&A litigation will solve the multijurisdictional M&A problem without incurring disadvantages inherent in many of the alternative proposals.
In particular, authorizing the JPML to transfer M&A litigation without mandating transfers to Delaware's Court of Chancery will not undermine shareholder rights. In contrast, most of the alternative proposals cede to management control over some of the primary mechanisms available to shareholders to address managerial misconduct--the right to a jury trial in a state other than Delaware and...