Merger Class Actions Dry Up As “Deregulation Tsunami” Looms

Financial executives already spending less time in court will likely see litigation costs drop even further as a series of legal and political forces curtail securities class-action lawsuits, according to speakers are a recent shareholder activism conference.

According to a group of mostly plaintiffs attorneys, a two-year-old court decision that put the brakes on the vast majority of merger shareholder lawsuits -- now mixed with the Trump Administration’s efforts to enact its “deregulatory agenda” in 2018 -- will result in a significant drop in disclosure-based legal headaches in the near future.

“There is an increasing inability of stockholders to gain judicial review of corporate conduct,” said Mike Barry, director with the law firm Grant & Eisenhofer at the Global Shareholder Activism Conference in New York last week. “Courts are acting as a gatekeeper to litigation. Did it shut down merger litigation? In some respects, it did.”

Critical Decision

Merger related class actions -- once the scourge of corporations -- have dropped significantly over the past two years following a Delaware Court of Chancery’s ruling in 2015.  The case, titled In re Trulia, makes it more difficult for plaintiffs to win a lawsuit challenging a merger and harder for plaintiffs’ attorneys to collect a fee award.

Traditionally, over 95% of publicly announced mergers resulted in securities litigation. However, since the Trulia decision the number has dropped to under 90%and it continues to decline.

“There has been a deliberate effort by the by Delaware courts [following the decisions] to curtail merger related litigation and limit judicial review of corporate behaviour,” Barry said, adding that judges have been focused on “meritless” litigation.

Having the courts more involved in vetting cases was needed since the number of merger related lawsuits was become unsustainable, said Lawrence Hamermesh, professor emeritus at Delaware Law School.

“I do agree that there have been developments that have circumscribed the frequency and availability of derivative shareholder class action litigation in the last couple years, but the lawsuits were being positioned as a job killer and a “merger tax,’” he said. “In many ways, Trulia was overdue.”

Regulation Is Next

With the court's showing restraint when it comes to securities litigation, the attendees agreed that the next focus for corporate financial professionals will be regulation.

“Across the board you have a deregulation tsunami, and it hasn’t really happened yet because President Trump didn’t have all of his people in place,” said Dennis Kelleher, CEO of Better Markets, a nonprofit that favors Dodd Frank enforcement.

While investors and plaintiffs attorney’s may decry the the move towards deregulation following the decrease in courtroom chances, Ted Frank of the Competitive Enterprise Institute argues that the stock market has already voted for the changes.

“We can continue to ask if the deregulatory agenda is it helping or hurting investors, but the market has spoken,” Frank said. “Investors prefer it.”