Jurisdictional Effects in M&A Litigation

• Author: Randall S. Thomas,Robert B. Thompson,Ronald W. Masulis,C. N. V. Krishnan
• Date: 01 March 2014
• DOI: http://doi.org/10.1111/jels.12037
• Published date: 01 March 2014

Jurisdictional Effects in M&A Litigation

C. N. V. Krishnan, Ronald W. Masulis, Randall S. Thomas, and

Robert B. Thompson*

We compile the most extensive hand-collected data set on all forms of M&A litigation in the

United States to study the effects of lawsuit jurisdictions during a sample period (1999 and

2000) of the fifth merger wave, a period characterized by an abundance of friendly one-

bidder deals and the near demise of the hostile offer. We find that only about 12 percent of

all M&A offers are challenged in the courts during this period. Almost half the suits are filed

in Delaware, while federal suits account for less than 9 percent of the suits in our sample. We

find a very small incidence of multijurisdictional litigation (about 3 percent of all suits),

unlike the recent sharp increase in such cases in the post-2008 global financial crisis period.

We find that litigation filed in Delaware is less of a barrier to deal completion than cases

brought in federal court. Litigation filed in federal court is associated with a significantly

higher takeover premium in all offers and in completed deals, suggesting that state court

cases, on average, put less pressure on bidders to raise takeover premia. In line with these

findings, we find that federal courts attract a significantly higher proportion of target-

initiated litigation than state courts; no target lawsuit is filed in Delaware during our sample

period. Finally, we find that while jurisdiction does not significantly affect settlement rates or

the consideration paid upon settlement, litigation challenging controlling shareholder

squeezeouts is more likely to settle with cash consideration paid to shareholders, reflecting

the stricter judicial standard applied to such bids.

I. Introduction

Using the most extensive hand-collected data set of mergers and acquisitions (M&A)

litigation in the United States currently available, this study documents the effects of lawsuit

jurisdictions on deal outcomes and lawsuit settlement. The analysis is based on a sample of

2,512 distinct M&A offers by U.S. acquirers announced during the 1999–2000 period,

which, as shown in Krishnan et al. (2012), is a representative period for studying M&A

litigation in the fifth merger wave period (1993–2001) that is dominated by friendly

single-bidder offers and few competitive or hostile offers (Andrade et al. 2001). This period

of analysis is preceded by the fourth merger wave (1975–1989), known for its prominent

hostile transactions and frequent bidder and target firm suits (Gilson & Black 2004), and

followed by the sixth merger wave (2003–2007), in which cash-financed transactions were

*Address correspondence to Randall Thomas at randall.thomas@Vanderbilt.edu. Krishnan is at Weatherhead School

of Management, Case Western Reserve University; Masulis is at Australian School of Business, University of New South

Wales; Thomas is at Vanderbilt University Law School; Thompson is at Georgetown University Law Center.

We thank the editor and four anonymous referees for very useful comments and suggestions.

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Journal of Empirical Legal Studies

Volume 11, Issue 1, 132–158, March 2014

132

very common (Alexandridis et al. 2011). The sixth merger wave was followed by the

post-2008 global financial crisis period, during which we see a rising percentage of M&A

deals facing lawsuits and multijurisdictional litigation (Daines & Koumrian 2012; Cain &

Davidoff 2012). Using a much more reliable data set, our study provides a clear baseline for

comparison with other periods of M&A activity.

Our data show that the most common form of M&A suits is shareholder class actions

(representing about 86 percent of all cases), which typically allege that target company

directors breached their fiduciary duties to their shareholders by selling the company too

cheaply. In contrast to the fourth merger wave, we find very few bidder company suits

claiming that a target board of directors that refuses to sell the company is in breach of its

fiduciary duties to shareholders, and very few target company suits alleging that a bidder

has violated federal securities, antitrust, or state corporate law by making its offer.1Indi-

vidual direct actions, derivative suits, antitrust cases, and multijurisdictional litigation are

also all relatively uncommon.2

In contrast to the post-2008 global financial crisis period, we find lawsuits challenge

less than 12 percent of M&A deals in our sample. Some scholars claim that since the late

1990s Delaware has continuously lost M&A litigation to other jurisdictions (Armour et al.

2012). Our data provide the first definite benchmark on what M&A litigation looks like at

the beginning of this period. We find that slightly less than half of M&A lawsuits in our

sample are filed in Delaware Chancery Court, less than 9 percent are filed in federal courts,

and roughly 40 percent are filed in state courts other than Delaware. Also, unlike the

dramatic rise in multijurisdictional litigation witnessed in the post-2008 global financial

crisis period (Cain & Davidoff 2012; Daines & Koumrian 2012), we find comparatively few

litigated M&A offers involve multijurisdictional litigation, that is, 3 percent of all litigated

offers, where lawsuits challenging a single transaction are filed in both federal and state

courts, or in more than one state court.

Using multivariate analysis, where we control for lawsuit type, transaction features

and industry, and year and offer-type fixed effects, as well as for selection bias, we find that

deals litigated in Delaware are more likely to be completed compared to cases brought in

federal court. However, takeover premia in deals subject to state court litigation are

significantly lower than deals subject to federal court litigation. These findings suggest that

in deals subject to federal court litigation, fewer bids are completed, but at significantly

higher premiums compared to deals subject to state court litigation. Indeed, federal courts

attract a significantly higher proportion of bidder- and target-initiated litigation, which is

correlated with lower deal completion rates, but higher takeover premiums in completed

deals. In fact, no target lawsuits are filed in Delaware during our sample period. We also

find that multijurisdictional litigation results in a significantly lower deal completion rate.

1Jarrell (1985) reports that target managements litigate in roughly one-third of all takeover attempts in the fourth

merger wave.

2There were only two antitrust cases, both of which entailed piggyback private actions that followed the announce-

ment of a government enforcement case.

Jurisdictional Effects in M&A Litigation 133