Merger & Acquisition Litigation Trends

A new study on merger and acquisition (M&A) litigation in 2014 reveals several significant trends.

Most notably, the majority of all lawsuits were filed in one jurisdiction, suggesting that companies are increasingly incorporating forum-selection clauses into their corporate bylaws as well as into their transaction documents, when it comes to a merger and acquisition.

As previously discussed on the Scarinci Hollenbeck Business Law Blog, forum selection clauses are common in business contracts, particularly those involving parties that are not located in the same state. In essence, a well-crafted forum clause provides that if a business dispute arises, it must be resolved in a court local to you.

To ward off multi-district shareholder litigation, many corporate bylaws now include provisions that indicate that the courts of a certain state —often Delaware — have exclusive jurisdiction for lawsuits alleging breach of fiduciary duties. According to Cornerstone Research, it appears to be working.

The study analyzed litigation challenging merger and acquisition deals valued over $100 million announced from 2007 through 2014, filed by shareholders of public target companies. It found that 60 percent of shareholder lawsuits challenging a proposed merger or acquisition were filed in only one jurisdiction.In addition, only four percent of the transactions were challenged in more than two courts. By comparison, the figure was 20 percent in 2011.

Overall, the study found that merger and acquisition litigation decreased slightly in 2014. Below are several other key trends detailed in Cornerstone’s report:

• Approximately 96 percent of deals valued over $1 billion were challenged in litigation, but the percentage of deals valued under $1 billion that were challenged dropped from 94 percent in 2013 to 89 percent in 2014.
• The average number of lawsuits per deal decreased, from 5.2 in 2013 to 4.5 in 2014.
• Lawsuits were filed more slowly last year. The first lawsuit was filed an average of 14 days after the transaction was announced, compared with 11 days in both 2012 and 2013.
• The majority of the resolved 2014 merger and acquisition litigation settled. More specifically, nearly 60 percent of lawsuits were resolved before deals closed, the lowest level since 2008.

As the study highlights, large merger and acquisition deals involving public companies are likely to result in at least one lawsuit. To help deter the burden and expense of litigation, companies should take advantage of legal tools such as forum selection clauses.