February 27, 2013
Griffith and the Market for Preclusion in Merger Litigation
Sean Griffith at Fordham and his co-author Alexandra Lahav (UConn) have a new paper forthcoming in the Vanderbilt Law Review on the role of preclusive settlements merger litigation. He argues that people who argue against multi-forum litigation have it all wrong multi-jurisdictional transaction litigation isn't necessarily a threat at all. Here's the abstract:
Abstract: The recent finding that corporate litigation involving Delaware companies very often takes place outside of Delaware has disturbed the long-settled understanding of how merger litigation works. With many, even most, cases being filed and ultimately resolved outside of Delaware, commentators warn that the trend is a threat to shareholders, to Delaware, and to the integrity of corporate law generally. Although the out-of-Delaware trend suggests that litigants are seeking to use the procedural rules of other jurisdictions to their advantage, we argue that the result need not threaten the interests of any of the stakeholders in deal litigation.
We reframe the process of resolving merger litigation as a market for preclusion, in which plaintiffs seek to sell and defendants seek to buy an important element of transactional certainty. Moreover, this market has the potential to efficiently process and price shareholder complaints while also providing benefits to Delaware and to corporate law more generally. We are not blind to reality, however, and also address how a well-functioning market for preclusion can be distorted by the opportunistic conduct of plaintiffs’ and defense attorneys alike.
Greater judicial oversight is necessary to preserve the benefits of this market while preventing the distortions brought on through opportunistic conduct. In order to make this a reality, however, judges in different courts must have a means of communicating and coordinating across state lines. We therefore offer a theory of horizontal comity in which judges build trust and cooperation through communication across jurisdictional boundaries. We use this theory to suggest a set of concrete policy proposals designed to provide for a more efficient market for preclusion.
Give it a read!
February 26, 2013
Gibson Dunn's 2012 Survey on No-Shops & Fiduciary Out Provisions
In this client alert, Gibson Dunn details the results of its survey of no-shop and fiduciary-out provisions contained in 59 merger agreements filed with the SEC during 2012 reflecting transactions with an equity value of $1 billion or more. Among other things, they have compiled data relating to
- a target’s ability to negotiate with an alternative bidder,
- the requirements to be met before a target board can change its recommendation,
- each party’s ability to terminate a merger agreement in connection with the fiduciary out provisions, and
- the consequences of such a termination.
Earnouts gone bad
File this under another reason to counsel your clients against taking an earnout. GeekWire describes the issue:
Nearly three years ago, Reston, Virginia-based TNS acquired Cequint in a deal that valued the Seattle caller ID startup for as much as $112.5 million.
At the time, everyone appeared happy. Cequint CEO Rick Hennessey said the acquisition “would accelerate our opportunities and improve the offering to our carrier customers,” while TNS CEO Henry H. Graham Jr. noted in the press release that the combination would create “a very powerful offering.”
But not everything is happy-go-lucky in this post merger world.
TNS’ acquisition of Cequint consisted of about $50 million in upfront cash and stock, with another $62.5 million to be delivered “for the achievement of future performance-based targets.”
$62 million, that's more than half of the total consideration in the transaction. You can bet the acquiror is facing some moral hazard. No surprise that the subsequent lawsuit is claiming that the acquiror intentionally gummed up the works to ensure that Cequint couldn't hit the benchmarks in the deal. From the notice of removal to federal court:
I'm not at all surprised that this kind of dispute pops up in the context of an earnout. What I am surprised about is that it's in court at all! Usually, disputes over enforcement of an earnout are taken care via arbitration baked into the merger agreement. It's a little surprising therefore to see it in court. Of course, I'll take back all of my surprise if the TNS files a motion to dismiss in federal court because of an arbitration provision.
More on merger-related litigation
Over at Reuters Blog there's still more on merger-related litigation. This issue has been getting more and more attention over the past couple of years. One wonders where it is going in terms of a resolution. Maybe nowhere?