Thursday, September 19, 2019

Trulia’s impact lessens but is still being felt, Cornerstone finds

By John M. Jascob, J.D., LL.M.

The impact of the Delaware Chancery Court’s Trulia decision on merger and acquisition deals appears to have stabilized, according to a new report released by Cornerstone Research. Shareholders of public target companies challenged 82 percent of merger and acquisition deals valued over $100 million in both 2017 and 2018, up from just 71 percent in 2016, when Trulia was decided. Prior to Trulia, shareholders had litigated around 90 percent of M&A deals valued over $100 million.

In Trulia, the Delaware Chancery Court denied approval of a proposed “disclosure-only” settlement under which the companies would supplement the proxy materials disseminated before the shareholder vote on the transaction in exchange for the plaintiffs dropping their motion and releasing claims on behalf of the proposed class of stockholders. The Chancery Court found that “[n]one of the supplemental disclosures were material or even helpful” and thus provided no meaningful consideration for a release of claims. Cornerstone notes that Trulia resulted in increased judicial scrutiny of proposed settlements of stockholder merger litigation and diminished the acceptability of disclosure-only settlements in merger objection cases.

The report also found an easing of the shift from state to federal courts that began with Trulia. Between 2009 and 2015, 97 percent of litigated M&A deals had been challenged in state court. Post-Trulia, the number of state-court challenges fell to just 18 percent in 2017 before rebounding to 34 in 2018. A total of 49 large deals were litigated in state courts in 2018, up from 21 in 2017.

“The most notable trend at the state level occurred in the Maryland state courts, where 12 deals were litigated in 2018, compared to none in 2017,” said co-author Ravi Sinha in a news release. The number of deals litigated in the Delaware Court of Chancery, however, was just 13 in 2018, up from seven in 2017 but down from 37 in 2016. The Third Circuit was the most active federal court in 2018, with more than twice the number of challenged M&A deals over the prior year.

Trulia also resulted in a lower propensity to challenge M&A deals, the report finds. The number of lawsuits per challenged M&A deal has remained around three since Trulia, compared to the 2009-2015 average of 4.7 lawsuits per deal.