At 22 years, William B. Chandler III had the second-longest tenure of any judge to serve on Delaware's Court of Chancery since the 1850s. But the lawyers and judges who gathered to honor him with a conference at Columbia Law School on Nov. 11 spent relatively little time discussing his accomplishments. Instead, the focus was on the dramatic rise in M&A litigation brought by shareholders and, more recently, in the number of deals where plaintiffs file suits in more than one jurisdiction. Those trends have had a profound effect on Chancery's role in the M&A world.
In 1999, shareholders filed suit on only 12% of deals, according to William Savitt, a litigation partner at Wachtell, Lipton, Rosen & Katz, who helped organize the conference and presented a paper on shareholder litigation. By 2010, the figure was up to 85%, Savitt said, citing statistics from research by Steven Davidoff of Ohio State University's Moritz College of Law. In the 1990s, only large deals or those involving an obvious potential conflict drew litigation, but now there are shareholder suits on mergers worth less than $100 million and on those in which the target has been fully shopped by an independent board that strikes an arms' length agreement with a third party.
As a result, the Delaware Court of Chancery has come to enjoy some of the benefits of an administrative law court, Savitt said, because Chancery sees just about every deal and is able to set standards on a range of practices from deal terms to plaintiffs' lawyers fees. Perhaps more importantly, Chancery has become a standard setter on what information companies should disclose to shareholders, traditionally a province of the Securities and Exchange Commission.
Leo E. Strine Jr., Chandler's successor as chancellor, acknowledged this function at an Oct. 19 hearing where he approved the settlement of litigation arising from People's United Financial Inc.'s $493 million agreement to buy Danvers Bancorp Inc. "When corporate America learns from previous cases and disclosure gets better," he said, "the target for disclosure-only settlements gets narrower." And as Delaware courts award lower fees in cases with disclosure-only settlements, plaintiffs' lawyers are more apt to bring such cases in other venues.
Strine addressed the problem of multijurisdictional litigation in his speech at Columbia. "In the past decade, fragmentation in the plaintiffs' bar has led to forum shopping in an attempt to gain leverage in obtaining leadership roles and, regrettably, in some cases, to obtain fees for little benefit to stockholders," he said. "These are suits about a single transaction where one authoritative and timely ruling is required. Competing proceedings are not only inefficient, but bad for investors and our economy." When Delaware law is at issue in a case, Strine said, Delaware courts should resolve it.
At the event's final panel, Gregory Williams, a partner at Wilmington's Richards, Layton & Finger PA, offered his thoughts on the multijurisdictional problem. Williams prepared a 42-page report on the topic at the request of Vice Chancellor J. Travis Laster in a case arising from the $170 million sale of Nighthawk Radiology Holdings Inc. to Virtual Radiologic Corp. Laster had censured the conduct of Nighthawk's lawyer, David Berger, a partner at Wilson, Sonsini, Goodrich & Rosati PC, in settling the case in Arizona rather than before Laster.
Unlike some company-side lawyers, Williams did not lament the trend. "We're people who make a living selling insecticide," Williams said of attorneys with practices similar to his, "and if the insects all died, we'd be out of business." The plaintiffs' bar has more and better lawyers who bring more litigation, which corporate defendants are almost always willing to settle. Those cases were a sideshow in the era of hostile takeovers but now take center stage.
Plaintiffs' lawyers often complain about excessive judicial skepticism, but Williams noted that there's been a more searching inquiry into defense counsel. He added that there's been an uptick in fees awarded to plaintiffs' lawyers and predicted that Strine would see a considerable increase in shareholder litigation during his term as chancellor.
With all of that will come increased scrutiny from outside Delaware of shareholder litigation as a means of monitoring board and management behavior, Williams predicted. Delaware learned to live with the possibility of federal incursion into state law during Chandler's 14 years as chancellor. That heightened awareness of outside forces will be useful to the state's courts as they manage a different kind of docket.
David Marcus covers law for The Deal magazine.