Class action suits continue to be filed in federal courts in record numbers, demonstrating a shift of venue from state to federal courts. Overall, 87% of class action suits were filed in federal courts in 2018, a significant uptick from 32% in 2013. Of the cases filed in federal courts, nearly half are considered mergers and acquisitions cases raised by shareholders.
This paper discusses the growth of federal class actions suits relating to mergers and acquisitions brought by shareholders. According to the authors, this "wave" of class actions filed in federal courts was precipitated by the Delaware Chancery Court's landmark In Re Trulia decision, effectively curbing the number of merger suits filed in state courts.
Tactics employed by plaintiffs remain largely consistent in recent federal cases. Plaintiffs typically still object to the purchase price, takeover process, or specific terms of the merger agreement. Additionally, plaintiffs continue to establish that omitted information in disclosures and irreparable harm require intervention at the federal level to protect shareholder interests.
However, there are some key differences between state and federal cases. At the federal level, plaintiffs typically start the process under Section 14(a) of the Exchange Act to establish proper jurisdiction of the complaint under federal law. Likewise, filing in federal courts comes with "speed bumps" not found in state court proceedings. Speed bumps such as heightened pleading requirements, disclosure requirements under federal securities laws, and resourceful federal judges can make suits more perilous in federal courts.
Despite speed bumps in the filing and adjudication processes, the plaintiff's playbook remains largely the same. Plaintiffs regularly settle for supplemental disclosures in exchange for attorney's fees (typically covered by directors and officers insurance). However, such settlements still present problems for companies and their defense counsels, mainly the risk of no global release of claims from the class of shareholders or post-merger lawsuits by other shareholders.
Some aspects of the switch to federal courts are beneficial to defendants. Federal laws routinely give strategic advantages to companies, directors, and defense counsels. For example, the Private Securities Litigation Reform Act requires heightened pleading requirements for plaintiffs seeking relief.
The paper concludes with guidance for buyers to continue to evaluate the strengths and weaknesses of the plaintiff's claims and the company's defenses, among other factors. However, the authors contend that companies likely have good odds in federal courts. While disclosure-only settlements have arisen as a preferred method of resolving class action suits in federal courts, the authors caution that this might not always be the case. Citing recent federal cases with "Trulia-like" decisions, corporate counsels should continue to expand their defensive playbook.
By Robert R. Long, Esq.
Robert Long is a Partner at Alston & Bird and the Leader of the Securities Litigation Group. He focuses on shareholder matters, mergers and acquisitions, corporate governance, regulatory compliance, internal investigations, and director and officer liability.
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Andrew Sumner is a Senior Associate at Alston & Bird. He focuses his practice primarily on securities class actions, merger litigation, shareholder derivative suits, director, officer, and professional liability matters, regulatory enforcement actions, corporate investigations, and other complex civil and criminal litigation.
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