Why Bylaw Solutions to Meritless Mergers and Acquisitions Suits Are Problematic
Lane Powell Shareholder Doug Greene authored a May 29 Law360 article titled “Why Bylaw Solutions to Meritless M&A Suits Are Problematic.” In the article, Greene discussed three types of amendments of corporate bylaws designed to corral and curtail meritless merger litigation: 1) specifying an exclusive forum, chiefly Delaware, for shareholder litigation; 2) requiring a losing shareholder to pay for the litigation defense costs; and 3) requiring a shareholder to hold a minimum amount of stock to have standing to sue.
Exclusive-forum bylaws best address the fundamental problem with merger litigation: the inability to coordinate cases for an effective motion to dismiss before the plaintiffs and defendants must begin negotiations to achieve settlement before the merger closes. Although the merger-litigation problem is virtually always framed in terms of the oppressive cost and hassle of multi-forum litigation, good defense counsel can usually manage the cost and logistics. Instead, the bigger problem, and the problem that causes meritless merger litigation to exist, is the inability to obtain dismissals. This is primarily so because actions filed in multiple forums can’t all be subjected to a timely motion to dismiss, and a dismissal in one forum that can’t timely be used in another forum is a hollow victory. … [L]itigation in an exclusive forum … would yield a more meaningful motion to dismiss process, which would weed out less-meritorious cases early, which in turn would deter plaintiffs’ lawyers from bringing as many meritless cases. The solution is that simple.
There will be consequences, though. Plaintiffs’ lawyers, of course, will tend to bring more meritorious cases that present greater risk, exposure, and stigma, and will bring more in Delaware, which is a defendant-friendly forum for good transactions but a decidedly unfriendly one for bad transactions. So while it certainly isn’t good that there are shareholder challenges to 95% of all mergers, the current system reduces the stigma of being sued and tends to result in fairly easy and cheap resolutions. In contrast, cases that focus on the worst deals and target defendants that the plaintiffs’ lawyers regard as the biggest offenders will require more expensive litigation and significant settlements and judgments.