A Summary of and Reaction to Professor Randall S. Thomas’s “What Should We Do About
Multijurisdictional Litigation in M&A Deals?”
Daniel Waxman
May 2, 2014
Abstract
Multijurisdictional deal litigation is not a recent phenomenon; it has influenced forum
selection in M&A cases since the 1970s. However, the changing landscape of M&A litigation in
recent years has resulted in an increased number of cases filed in multiple jurisdictions. This
increased frequency, combined with the decreasing quality of complaints, has resulted in an
unjustified increase in litigation and settlement costs for defendant-corporations. This paper
dissects Randall S. Thomas’s 2013 article, “What Should We Do About Multijurisditional
Litigation in M&A Deals?,” published in the Vanderbilt Law Review. Thomas’s article explores
the causes and consequences of and proposes solutions to this recent trend.
According to Thomas, two potential solutions exist to remedy the recent increase in
multijurisdictional deal litigation. The first is the defendant-corporation’s adoption of a forum
selection clause, effectively allowing the corporation to select the forum in which to litigate the
deal challenge. However, issues exist as to the clause’s enforceability and whether plaintiff’s
attorneys can circumvent it. The second potential solution is a tweaked version of the current
system of judicial comity, allowing judges from the various forums in which the litigation is filed
to discuss and decide which forum is most appropriate. This solution is not without its own
problems, including potential disagreement among judges and the absence of an effective
policing mechanism.
Introduction
a.
Paper Outline
This paper summarizes the potential causes for the increase in multijurisdictional
litigation, and supports Thomas’s finding that the cause may be a combination of multiple
factors. It then assesses the costs and benefits of multijurisdictional litigation, and ends with a
discussion of proposed policy responses including forum-selection clauses and comity (legal
reciprocity).
b.
The Driving Force: Agency Cost or Plaintiff’s Bar
As described by Thomas, Multijurisdictional M&A litigation is “the latest battleground”
in the battle between investors and companies concerning representative litigation claims, the
merits of such claims and who the true beneficiaries are. Investors argue that direct and
derivative law suits are necessary to efficiently monitor management behavior, while companies
respond that the plaintiffs’ bar is the driving force behind such claims “as agency costs in
contingency fee suits make the lawyer the real party in interest.”
c.
Paving the Path: Civil Procedure
The existing federal rules of civil procedure create the potential for multijurisdictional
litigation in M&A deals. For example, according to Thomas: “Shareholders that wish to
challenge the proposed terms of an M&A transaction can sue in either a state or federal court
located in either the target company's state of incorporation or the location of the company's
headquarters (assuming the defendants have the necessary presence in the jurisdiction).”
Though plaintiff shareholders may bring the action in either of the two jurisdictions
mentioned above, the Internal Affairs Doctrine continues to govern the controlling law
(assuming a state cause of action). Therefore, while a lawsuit challenging a Delaware
corporation transaction may be filed in the location of the company’s headquarters, Delaware
corporate law remains controlling. However, hundreds of cases each year may be brought as
federal securities class actions, in which case federal law controls:
This begs the question, why file in a different jurisdiction only to have the same law
applied? One response Thomas offers is that Delaware courts are relatively skeptical of M&A
deal challenges alleging disclosure violations, making it more difficult for plaintiffs to have their
day in court. This explanation may also explain the recent “upsurge in multijurisdictional
litigation,” considering the comparable upsurge in disclosure-based complaints.
d.
Recent Trends, Their Effects, and Potential Responses
i.
Trends
In his article, Thomas points out that “[s]ince the end of the financial crisis, . . . the number
of jurisdictions in which shareholders attack each transaction,” and “the percentage of large deals
that have been challenged in multiple jurisdictions” have increased. For example, from 2005 to
2011, the percent of large deals challenged in multiple jurisdictions rose from 38.7% to 94.2%.
ii.
Effects
Thomas’s article presents multiple views concerning the costs and benefits of
multijurisdictional litigation. For example, “[t]he defense bar argues that these suits have vastly
increased the transaction costs of completing deals without producing any offsetting benefits,”
while others argue that such costs are minimal and provide investors the benefit of choice of
forum.
In a 2012 article in the Northwestern University Law Review, Professors Thomas and
Thompson argued that although multijurisdictional litigation increases costs, the cost increases
are modest given that (1) “not much discovery is taken in most deal cases and few pretrial
dispositive motions are filed and briefed,” (2) “only one preliminary injunction motion is
scheduled per transaction,” and (3) although “more than one court must be involved in every
case, . . . judges are not being asked to decide weighty issues, . . . but rather to manage some
preliminary discovery motion practice . . . .”
iii.
Responses
A.
Two Primary Responses: Forum Selection Clauses and Judicial
Comity.
Thomas’s article proposes two potential responses to the recent increase in
multijurisdictional litigation. The first is supported by the defense bar and its academic
supporters. This response, according to Thomas, is to completely “eliminate the shareholders’
choice of forum,” which can be done by mandated litigation in the state of incorporation, or
allowing the target’s board to choose the litigation venue. The second potential response is
supported by “judges, academics, and investors who believe the current system of judicial
comity is appropriate,” though some tweaks may be needed. These responses are discussed in
greater detail in Section 3 below.
B.
Two Secondary Responses: Dismissing Weak Actions and Limiting
Fees in Disclosure Benefits Cases.
Thomas suggests two additional responses to the increase in multijurisdictional litigation:
First, assuming the increase in disclosure-based settlements is an indication that the quality of
M&A suits is decreasing, “courts in all jurisdictions should . . . dismiss[] . . . weak shareholder
class actions and derivative suits, particularly those that allege only disclosure violations in arm’s
length acquisitions.”
Second, Thomas suggests that if companies are in fact correct that the plaintiffs’ bar is
the cause of this increase in multijurisdictional litigation, “judges should not hesitate to cut or
deny fees in disclosure-based settlements where they find that the resultant change to the
disclosures is of little value to investors.” Such an approach could dissuade plaintiff’s
attorneys—arguably the primary beneficiary of such suits—to waste the court’s time with
litigation that may result in no real benefit to the ostensible plaintiffs.
According to Thomas, disclosures are the “most common non-monetary result of
shareholder litigation,” and should the court determine that such disclosures provided
“important” information to shareholders, there is still a “wide variance among those benefits that
are considered material.” In fact, the Delaware Court of Chancery has stated that “it will grant
‘minimal fees for minimal benefits and major fees for major results.’”
Professor Davidoff of Ohio State University College of Law suggests that increased
disclosures to shareholders should “produce new and unfavorable information about the merger
and therefore reduce the percentage of shares voted in favor of the deal.” However, a
forthcoming study to be published in the Texas Law Review conducted by Steven M. Davidoff, et
al., concludes that there is “no significant evidence that disclosure-only settlements affect
shareholder voting” and suggests that “courts should reject disclosure settlements as a basis for
attorney fee awards.”
However, the recognition that additional disclosures create value for shareholders
provides an incentive to plaintiff’s attorneys to take on disclosure-only cases. In fact, during
summer 2013, I was researching what our adversary’s fees were likely to be in the In re Google
Shareholder Litigation case my firm was settling. The more we searched, the more “therapeutic
benefit” cases (providing the shareholder plaintiffs non-monetary benefits) we came across
relative to monetary benefit cases. Thus, therapeutic benefit cases comprise a large portion of
attorney’s fee cases in Delaware corporate law relative to monetary benefit cases. Therefore,
either dismissing a larger portion of these solely therapeutic cases, or at least providing increased
certainty as to the amount of fees that will be awarded (at a rate much lower than the current
rate) could be sufficient to deter such claims.
1.
The Problem: Recent Increase in Multijurisdictional Litigation and DisclosureBased Settlements—A History of Class Actions
This section includes a brief overview of the history of M&A litigation and concludes
with a discussion of the benefits and drawbacks of multijurisdictional litigation. In the 1980s,
takeovers began to accelerate as corporate conglomerates were broken up by raiders convinced
that the value of the separate parts was greater than the whole. In the 1990s, multijurisdictional
litigation existed in only a small number of cases and a relatively large percent of deals resulted
in quantifiable monetary benefits to shareholders. From 2007 to 2012, the number of deals
decreased while the number of cases involving multijurisdictional litigation increased, and many
cases resulted in disclosure settlements.
a.
The 1980s Takeover Wave: A Response to Over-Conglomeration
This era represents the “Golden Age” of shareholder litigation, and is characterized by a
sharp increase in hostile takeovers due to the realization that conglomeration is not quite as
profitable as managers once presumed:
As Thomas suggests, “[t]hese deals frequently spurred both the target and bidder to file
suits.” Even in this era the litigation was multijurisdictional. An excerpt from Thomas’s article:
Bidders would ask the courts to strike down the target's defenses under state
law and would challenge the accuracy of the target company's disclosures under
federal law. If the target was a Delaware corporation, the bidder would routinely
file in the Delaware Chancery Court as quickly as possible to fix the forum that
would determine what defenses the target could use and how it could use them in
responding to the unsolicited takeover proposal.
Targets would respond as quickly as possible by filing their own suit in their
hometown state court. They would ask the court to permit the use of their defenses
as they pleased or try to impede the bid in a variety of ways, such as alleging that
the bidder had violated federal securities laws. The target's hope was that the judge
would be more sympathetic to its situation given the large number of local workers
that it employed.
While costly and time-consuming (due to a “flurry of jurisdictional motions”), this
“blatant forum shopping” described above was commonplace in such litigation, and seen as
necessary given the “high stakes” associated with the privilege of litigating the case in a given
party’s preferred forum.
While shareholders filed class actions in the 1980s, the real drama lied in the suit between
the bidder and target. However, Thomas suggests that the shareholder class action “assume[d]
greater prominence” after the Delaware Supreme Court held in Time Warner that “Paramount’s
tender offer was reasonably perceived by Time’s board to pose a threat to Time and that the
Time board's ‘response’ to that threat was, under the circumstances, reasonable and
proportionate.” According to Thomas, this holding essentially allows a “target unbridled
discretion to use a poison pill, resulting in the near demise of the hostile tender offer and paving
the way for shareholder litigation to assume greater prominence.”
b.
1993–2001: Friendly Mergers and the Baseline Measure of M&A Litigation
“The 1990s brought new waves of friendly mergers,” and the booming stock market only
added to the frenzy by facilitating stock-for-stock transactions:
The Time Warner case mentioned above and the friendly nature of most 1990s mergers
resulted in a drastic decline in bidder-target litigation, and Thomas notes that “shareholder
representative actions filled the void.” Such class actions generally resulted in substantive,
quantifiable results. For example, Thomas’s article suggests that “they made it harder for bidders
to complete deals but had a positive effect on premiums in completed deals. About one-third of
these cases settled, and in about 40% of those settlements, investors received an increase in the
deal consideration.”
According to Thomas, this era provides the “baseline measure” of M&A deal litigation.
While a large proportion of M&A deals in the late 90s resulted in some form of litigation,
Thomas suggests that “there was little multijurisdictional litigation,” and “representative suits
had an economically beneficial impact for shareholders. Settlements occurred regularly,
frequently increasing the deal price paid to target company shareholders. Shareholder litigation,
in other words, was a useful mechanism for policing the agency costs of management.”
c.
2007–2012: The Financial Crisis
As evidenced by the graph below, the drying up of the credit markets during the 2007–
2008 global financial crisis resulted in a drop in M&A deals in 2008 and again in 2009, followed
by a leveling off in 2010 where the number of deals has remained steady at around 42 thousand
throughout 2011 and 2012. Thomas proposes that such a drop can be viewed as a product of the
2007 financial crisis in combination with the “Delaware Chancery Court's decision in Air
Products & Chemicals, Inc. v. Airgas, Inc. and the Delaware Supreme Court's ruling in Versata
Enterprises v. Selectica, Inc.,” making hostile takeovers more difficult by sanctioning target
company defenses including the combination of a poison pill and classified board.
In addition to decreasing the number and value of M&A deal transactions, Thomas
suggests that the financial crisis and legal landscape of the mid-to-late 2000s also resulted in
three “undesirable shifts in representative shareholder litigation.” First, though the number of
post-crisis M&A deals has decreased, the total number of attacked deals has stayed constant, and
as a result the percentage of deals being challenged is much greater now than in the pre financial
crisis era. Professor Thomas makes the argument that the static number of challenges throughout
the depressed M&A environment is evidence of the plaintiffs’ bar’s influence on deal litigation,
given that the bar has “a fixed amount of litigation capacity . . . and therefore continuing to file
roughly the same number of cases.” To illustrate:
Second, though the number of M&A deals decreased during the 2007–2012 era, there
was also a “sharp uptick in multijurisdictional litigation.” For example, from the year 2000 to
2010, the percentage of deals targeted by multijurisdictional cases increased from 3.3% to
47.6%. See the following graphic summarizing the number of cases subject to multiple
jurisdictions from 2007 through 2013:
Number of Filing Jurisdictions:
Finally, Professor Thomas notes that “[s]ettlement patterns appear to have changed as
well.” For example, of the cases settled in 1999 and 2000, 42% resulted in increased
consideration for shareholders and only 18.5% involved disclosure claims, however in as early as
2005 “disclosure-based settlements constituted about 63.9% of all settlements; by 2011, that
number rose to 79.5%.” Such a drastic shift in settlement benefits is concerning given that, as
Thomas points out, “the resultant change to the disclosures is of little value to investors,” while
plaintiff’s attorneys still receive, on average, between $400,000 and $575,000 for such
settlements. I see this as a major incentive for plaintiff’s attorneys to continue bringing cases,
regardless of the actual benefits to shareholders, so long as they continue to receive fee awards.
d.
The Arguments For and Against Restricting Choice of Forum
i.
Argument For: Multijurisdictional Litigation is an Abusive ForumShopping Technique
Thomas points out that during the M&A “Golden Age” of the late 1970s and 80s, forum
shopping was seen as simple zealous advocacy necessary in M&A litigation utilized by firms
representing both plaintiffs and defendants. However, Thomas continues, “the defense bar now
represents only defendant-corporations” and, “[a]s a result,” such firms and their corporate clients
now argue that “multijurisdictional litigation is an abusive forum-shopping technique.”
Therefore, the defense bar advocates for the adoption of forum-selection provisions which, in its
view, would remedy such abusive forum-shopping, but would also effectively “reverse the forum
shopping in their clients’ own favor.”
ii.
Argument Against: The Existing System of Comity is Sufficient
Thomas’s article explains that our existing system of federalism has resulted in and
“fostered the horizontal interaction of sister state courts as well as the vertical back and forth
between state and federal courts.” Such a long-standing, successful system should not be
overturned without “careful consideration,” as this state of frequent multijurisdictional litigation
and disclosure settlements may be just another “passing fad.”
Before proposing solutions to the “problem” of multijurisdictional litigation, it is
important to discuss whether a solution is needed by assessing the reason for its recent increase
in frequency and its costs and benefits.
2.
The Causes, Costs, and Benefits of Multijurisdictional Litigation
Multijurisdictional litigation has burdened M&A transactions since the mid-1970s.
However, before analyzing “solutions” to the “problem” of increased multijurisdictional
litigation, it is important to determine the reasons why this increase has occurred as well as its
costs and benefits.
According to Thomas’s article, the recent increase in multijurisdictional litigation can be
attributed to the legal landscape condoning it, plaintiff’s firms being incentivized to bring such
claims, non-Delaware courts’ willingness and desire to accept such cases, and the desirability of
non-Delaware court procedures.
Further, Thomas suggests that multijurisdictional litigation per se is not all bad. For
example, it conforms to traditional rules, so that leaving it in place does not shock the current
system. It also preserves states’ abilities to govern corporations operating within their borders
and keeps Delaware in check by allowing other states to influence corporations and the corporate
legal landscape. However, the costs are substantial and include increased settlements and
attorney’s fees due to many courts’ willingness to accept cases that would otherwise be rejected
in Delaware; an unjustified increase in the use of judicial resources; plaintiffs firms filing
premature complaints to substantiate their claim to the lead plaintiff designation; and courts
accepting cases solely on the basis that if the case is dismissed it may be accepted in a different
jurisdiction.
a.
The Cause of the Recent Increase in Multijurisdictional Litigation is Fourfold
i.
The Legal Landscape: Matsushita Sanctions Multijurisdictional Litigation
Thomas suggests that Matsushita Electric Industrial Co. v. Epstein, a United States
Supreme Court case decided in 1996, “allows plaintiffs that have been left out of a deal litigation
in a first court (often Delaware) to file suit in a second court (federal or another state) in order to
try and gain control over the entire litigation.”
The effect of the above rule shifts the power structure between defense and plaintiff firms
in favor of defense firms. For example, once a case is filed in Delaware, a second plaintiff’s firm
may file in a different jurisdiction and threaten to settle the case and release all claims, including
the case that was filed first. To that end, Thomas suggests that “[d]efendants may run a reverse
auction, in which competing plaintiffs’ counsel offer to settle their suits at the lowest price.”
I see Thomas’s “reverse auction” effect of Matsushita having multiple effects. First, as
Thomas suggests, it will likely reduce the value of the suit for the plaintiff’s firms. This will in
turn create a disincentive for plaintiff’s firms to put in the extra work to file the initial suit given
the possibility of a filing in a different jurisdiction. Therefore, the initial filing will likely be less
detailed. To that end, it puts much of the bargaining power in the hands of defense firms who
are now able to pit multiple plaintiff firms against each other to lower the settlement price.
ii.
Newer and Smaller Plaintiffs’ Law Firms Have Incentives to Bring These
Cases
First, as stated in Section a above, multijurisdictional litigation is a disincentive for a
larger, more established law firm to expend time, money, and other resources bringing a claim,
when it can be taken over by a filing in another jurisdiction. The flipside to this argument is that
Matsushita is an incentive for smaller, less-known firms to file on a case already pending in a
corporation’s state of incorporation (usually Delaware), should that corporation have its
headquarters in the smaller firm’s state. Thomas indicates that if a smaller firm can “establish
[itself] as lead counsel in an action in any one of these jurisdictions, [it] will have substantial
leverage to get at least part of any attorneys’ fee award paid in a global settlement of all the
competing cases.”
iii.
The Market for Corporate M&A Cases
First, it is necessary to determine whether courts, notably the Delaware Chancery Court,
desire to retain or increase the number of M&A cases filed in their jurisdiction. Given
Delaware’s prominence in all matters corporate, it may not seem necessary for the Delaware
courts to vie for as many M&A cases as possible; after all, Thomas suggests that “their dockets
are very busy, and none of the judges seem to be lacking for things to do.”
However, Thomas further suggests that the Delaware courts may be “concerned that the
state will lose companies, a significant concern in a state where corporate fees account for 15%
to 20% of the state’s budget.” The fact that “Delaware courts have awarded fees that are on
average $400,000 to $500,000 higher than other courts” evidences Delaware’s desire to retain
M&A cases, or simply represents Delaware’s acceptance of only the most meritorious cases
(evidenced by Delaware judges “publicly disparag[ing] the quality of many of the cases being
filed”).
The Chancery Court’s ability to distinguish the meritorious claims and dispose of others
will likely lead to the strongest cases being initially filed in Delaware where the judges are
“experienced and knowledgeable” and will “issue[] predictable and speedy decisions.”
Delaware’s expertise also incentivizes plaintiffs to bring weaker claims in alternative
jurisdictions; non-Delaware judges are more likely to consider negative consequences of a
specific transaction in that court’s jurisdiction (such as mass job losses and other economic
harm) than the relatively objective Delaware courts.
iv.
Variances in Court Procedures
According to Thomas, there are additional procedural variances between the Delaware
courts and those in other areas of the country that may detract from a plaintiff’s willingness to
file an M&A case in Delaware. For example, some states may “move forward without waiting
on the delivery of proxy statements,” while other courts may be less reluctant to “enjoin a
transaction in which no other bidder has come forward,” and finally “the Delaware Chancery
Court does not permit juries.”
Each of the above factors may have contributed in whole or in part to the rise in
multijurisdictional litigation, but to proffer a compelling solution, one must be clear that there is
a problem, so the paper now turns to the costs and benefits.
b.
The Benefits and Costs of Multijurisdictional Litigation
Similar to the causes of multijurisdictional litigation, the costs and benefits are
multifactorial and cumulative, however it is difficult to quantify, without additional research,
which are most substantial.
i.
The Benefits: Conforms to Traditional Rules, Preserves State’s Ability to
Govern its Corporations, Keeps Delaware in Check
The first benefit offered by Thomas’s article is that the current system conforms to the
status quo in our legal system. Absent an extraordinary exception to this time-tested system, it
may be best to leave well enough alone.
The second benefit suggested by Thomas is that the United States corporate landscape
allows states to influence the corporations that reside within its borders. For example, as stated
by Professor Alan R. Palmiter in his Corporations E&E (seventh edition), the Internal Affairs
Doctrine requires state courts “to accept the corporate law rules of the incorporating state, even
when those rules are different or inconsistent with rules of the forum state.” While this provides
the governing law for corporations incorporated under its laws, the state has little ability to affect
the laws by which foreign corporations merely operating within the state abide. Therefore,
multijurisdictional litigation, assuming it provides for increased litigation in the states in which a
corporation is doing business, may provide an additional means for the courts of a given state to
regulate corporations operating within that state’s boundaries.
Finally, in conjunction with the previous point, multijurisdictional litigation not only
allows courts to adjudicate the behavior of foreign corporations operating within their borders,
but would also reduce Delaware’s virtual monopoly of corporate law. According to Thomas, it
“gives other states’ courts a channel to articulate their state’s interest in these cases and thereby
influence corporate law.”
ii.
The Costs: Increased Settlements, Attorney’s Fees, Judicial Resources,
Hasty Filings, and Inter-Court Competition.
A.
Settlement and Attorney’s Fees
While there has been little empirical research on the direct costs of multijurisdictional
litigation on defendant corporations, Professor Thomas argues that any cost increase due to
attorney’s fees and settlements is likely minimal. For example, of the 124 deals over $100
million in 2010, over 28% were dismissed without settlement; however, the impact of
multijurisdictional litigation on the cases that do settle is unclear. Thomas further argues that
while multijurisdictional litigation may create more settlements if courts in states other than
Delaware are less likely to dismiss a case, such settlements are not likely to result in any direct
costs to the defendant corporations, as “these settlements involve increased disclosure to the
class of affected shareholders, and not increased consideration.”
Thomas further claims that it is unlikely that defendant corporations will incur any
substantial increase in attorney’s fees due to multijurisdictional litigation. First, deal litigation is
characterized by few significant motions, little discovery, and most cases are resolved quickly.
Second, as stated, when cases are filed in multiple jurisdictions, it allows defense counsel to “run
a reverse auction,” essentially forcing plaintiff’s firms in different jurisdictions to bid each other
down. Third, “most multijurisdictional cases are only litigated in one forum because the judges
and attorneys from each court agree on which court should hear the case.” Finally, “only one
preliminary injunction hearing needs to be scheduled per transaction.” Therefore, Thomas
concludes, while defense costs may increase slightly, they are likely immaterial and difficult to
quantify.
However, former Chancellor and current Chief Justice of the Delaware Supreme Court
Leo Strine argues that the costs of attorney’s fees from settled cases are more substantial than
Thomas suggests. For example, Strine argues that plaintiffs “attack third-party merger transactions
regardless of whether any conflict of interest is involved, and propose settlements that, as we shall soon
see, provide monetary benefits to the plaintiffs’ lawyers, not the class.” Further, such attorney’s fees
are substantial, while the benefits provided by the litigation to the plaintiff shareholders are not:
[G]rowth in the frequency of deal litigation does not seem to be matched by growth
in recoveries for those whose interests are to be represented in such litigation. To
the contrary, the recent evidence . . . demonstrates the predominance of deal
litigation settlements involving payment of attorney’s fees to plaintiffs’ counsel,
but no payment to class members.
We acknowledge that in some circumstances supplemental disclosure or
other non-monetary consideration can justify a settlement in which plaintiffs’
counsel earns a fee, but the absence of any monetary consideration in 84% of deal
litigation settlements, together with the increase in the volume of such litigation,
suggests that less salutary considerations may be at work, and that there is a
systemic failure endangering the ability of representative shareholder litigation to
produce net benefits to investors.
Strine likens disclosure cases to medical malpractice cases, asking whether “it would be
acceptable for 84% of medical malpractice suits to be settled with plaintiffs’ lawyers succeeding
in obtaining only additional information about what the physician did wrong, but not getting a
monetary award for their clients and still getting a fee for their victory.”
Finally, while Thomas argues that multiple jurisdictions favor defendants because it
empowers them to conduct a reverse auction effectively decreasing the settlement price, Strine
sees it differently:
[F]ilings by multiple plaintiffs' law firms in multiple forums can be viewed as
cooperative, as well as competitive, because the resulting additional defense costs
and uncertainties about which court will hear the case, and how it will decide it,
increase the pressure on defendants interested in global resolution of litigation to
pay larger overall attorney's fees than might be paid if litigation were confined to a
single forum.
B.
Judicial Resources
Intuitively, Thomas suggests that the more jurisdictions a case is filed in, the more effort
courts, judges, court staff, etc. must expend to resolve the case. However, as stated in the
previous Section, Thomas points out that that M&A deal litigation requires relatively little court
effort, “so courts will probably expend relatively few resources on this litigation,” and the courts
outside Delaware assume these cases voluntarily.
Another cost of multijurisdictional litigation purported by Thomas is an increased
number of frivolous claims. Regardless of the materiality of the incremental costs within a given
deal litigation, increasing the total number of cases may incur a substantial cost on defendant
corporations. In fact, Thomas points out that “a common refrain from the defense bar is that all
M&A deal litigation is frivolous.” (emphasis added). Given the Court of Chancery’s disdain for
and ability to detect frivolous deal litigation, it may behoove a plaintiff’s firm to file a weaker
case in a different jurisdiction. In addition, recent “settlement percentages in Delaware have
gone from 48.7% of all M&A class actions filed in 2005 to 76.9% of all such cases in 2012,” and
“in 2005, disclosure-based settlements constituted 67% of all settlements in deal litigation, but
. . . by 2011, this figure had increased to 84% of all settlements.” This is not to say that all
disclosure-based claims are frivolous, though according to Thomas, in many cases “the resultant
change to the disclosures is of little value to investors.”
The disclosure settlement is an indication of the poor quality of most M&A cases filed in
the recent merger wave, and many commentators blame the decreasing quality on
multijurisdictional litigation given that many cases are filed in jurisdictions more sympathetic to
weak deal cases than Delaware. According to Leo Strine, “[c]orporations incorporated in many
states now appear to suffer material costs in litigation over multiple jurisdictions, which results
in payment of attorneys’ fees but no benefit for shareholders.” The following chart summarizes
the disparity in recent years between cases that have been settled or dismissed and those that
have gone to judgment:
Further, Strine and his co-authors continue, multijurisdictional litigation leads to
“unnecessary expedited proceedings in weak cases.” Generally, the defendants defending a case
brought in the corporation’s state of incorporation “would be inclined to oppose plaintiffs’
request for expedited proceedings, and the court would be inclined to deny that request.”
However, when an additional case is filed in a corporation’s state of operation or principle place
of business and “in the absence of reasonable certainty that the court in that other forum would
abstain from exercising jurisdiction, the defendants have little practical choice but to agree to and
actively support expedition” resulting in increased litigation costs.
C.
Hasty Filings
The issue here stems from the fact that, according to Thomas, courts tend to award lead
counsel position to, or at least consider when awarding the position, which plaintiff’s firm filed
first. This incentivizes plaintiff’s firms to hurriedly throw together a complaint, file, and then sit
back and determine whether there is a meritorious claim somewhere behind the haphazard
complaint. Thomas’s suggested response, already adopted in Delaware, is to simply “give
preference to well-researched cases over poorly drafted ones.” Strine and his co-authors mention
that “[a]nother foreseeable result [of hasty filings] is the imposition on corporate defendants of
the costs of addressing and dismissing inadequately supported derivative complaints, costs that
are ultimately borne by investors.”
D.
Inter-Court Competition
Finally, Thomas suggests that when courts compete to hear these deal cases, “[p]laintiffs’
counsel has incentives to push for class certification and lead counsel designation,” and a “court
that is competing to keep these cases may, in order to keep the case, be tempted to move too
quickly to resolve these important procedural questions.” Furthermore, Thomas continues, a
given court may refuse to reject an otherwise meritless claim if it suspects a plaintiff firm may
file in a different court that would be more willing to accept the case. The result of such
reluctant acceptance is that the corporation must settle a case that would otherwise have been
dismissed, again providing a benefit to the plaintiff’s firm and nothing to the shareholders.
c.
Potential Solutions to the Disclosure-Based Settlement Issue
Many problems associated with multijurisdictional litigation described above stem from
the fact that the only benefit provided to shareholders is additional information, while plaintiff’s
firms are making away with attorney’s fees based on the court’s often nebulous quantification of
such therapeutic benefits. However, Thomas suggests two ways for courts to efficiently remedy
this issue. First, “routinely den[ying] plaintiffs’ expedited-discovery requests when the case
appears frivolous . . . ‘erases plaintiffs’ primary leverage to force pre-closing settlements’ and
thus reduces the risk of an injunction.” Second, courts could grant motions to dismiss when the
case appears frivolous.
Thomas also cautions readers concerning two problems with these potential solutions.
First, multijurisdictional litigation incentivizes defendants to support motions to expedite for fear
of losing the case to a competing jurisdiction. Second, it is important to realize that, though it
seems most disclosure-based cases are relatively meritless, some result in important benefits for
plaintiffs. For example, in In re Del Monte, the initial claims were largely disclosure-based, but
the additional information received by the plaintiffs “revealed that the board’s investment banker
had ‘secretly and selfishly manipulated the sale process to engineer a transaction that would
permit [it] to obtain lucrative buy-side financing fees.’” Therefore, “we must take care to avoid
throwing the baby out with the bath water” by ensuring that a claim is in fact frivolous before
treating it in the manner the solutions above suggest.
3.
Potential Policy Solutions to the Costs Imposed by Multijurisdictional Litigation
Professor Thomas’s article focuses on two potential policy responses to remedy the
increased costs to defendant corporations caused by multijurisdictional litigation: Forumselection clauses and improved comity. Forum-selection clauses may help to remedy the issue
by providing, in the corporation’s bylaws or charter, that “all shareholder suits [are] to be heard
in the Delaware Chancery Court or give the defendant-company’s board of directors the option”
to choose its preferred forum. Improved comity would provide for the judges who receive the
cases to discuss and “resolve amongst themselves which single court ought to decide all of the
cases arising out of the transaction.”
a.
Forum-Selection Clauses
Thomas suggests that implanting a forum-selection clause in a corporation’s charter or
bylaws “limit[s] the jurisdictions in which shareholders can pursue representative litigation.”
This is perhaps the easiest, least expensive, and most practical solution for corporations
themselves to not only solve the problem of increased costs resulting from plaintiffs filing cases
in multiple forums, but also to provide the defendant-corporation its forum of choice.
As suggested by Vice Chancellor Laster in Revlon, “if boards of directors and
stockholders believe that a particular forum would provide an efficient and value-promoting
locus for dispute resolution, then corporations are free to respond with charter provisions
selecting an exclusive forum for intra-entity disputes.” However, despite its apparent ease and
practicality, Thomas notes that “only a small number of firms have followed this advice,” and
warns that widespread adoption of this solution creates a potential for defendant corporations to
essentially bribe Delaware into becoming more management friendly by threatening to
commence litigation elsewhere.
i.
Advantages to Forum-Selection Clauses
A.
Delaware Law Interpreted by Delaware Courts
The most obvious and important advantage to forum selection clauses cited by Thomas is
that, assuming most litigation will occur in Delaware as a result, the Delaware Chancery Court
and Delaware Supreme Court remain the principal interpreters of the vast body of case law the
Delaware courts have developed over hundreds of years. The Delaware Chancery Court is
world-renowned for its ability to efficiently churn out difficult corporate law cases.
Given the Chancery Court’s expertise and the complexity of many corporate law
concepts, Thomas notes that “Delaware judges and lawyers often complain that other
jurisdictions do a poor job of applying Delaware corporate law’s highly nuanced fiduciary
principles because they are unfamiliar with those principles and have few opportunities to learn
about them.” Therefore, Delaware courts and defendant corporations see forum-selection
clauses as a way to not only reduce the costs associated with multijurisdictional litigation, but
also to provide more certainty to the application of the Delaware legal principles, further
reducing the costs of such litigation.
To be sure, the legal certainty provided by the body of case law created by the Court of
Chancery is a major advantage of incorporation in the state. To allow courts unfamiliar with the
nuances of such laws to decide cases that would otherwise be resolved in Delaware reduces such
certainty and increases not only the cost of litigation, but also the cost of questionable corporate
decisions-making. Thomas agrees: “When other judges [outside of Delaware] are faced with
these cases, it may lead to a wider variation of results, so that some bad cases may suddenly take
on great value.”
B.
The Forum-Selection Clauses are Seemingly Enforceable
Thomas notes that a corporation’s charter is “claimed to be [a] contract[], and forum
selection provisions, in general, are permissible as a matter of contract law, so these particular
types of clauses must also be enforceable.” Furthermore, former Chancellor Strine recently held
that “a forum selection clause adopted by a board with the authority to adopt bylaws is valid and
enforceable under Delaware law to the same extent as other contractual forum selection clauses.”
However, it is still unclear whether the corporate board’s fiduciary obligations underpinning the
corporate charter have an effect on the clause’s enforceability.
C.
Forum-Selection Clauses are Implemented by Corporations
One huge advantage to forum-selection clauses not mentioned in Thomas’s article is that
they are implemented by the very institutions adversely affected by the recent spike in
multijurisdictional litigation. To the extent that the clauses are deemed valid and enforceable,
corporations’ incentives are aligned with implementing these clauses to reduce the increased
costs associated with such litigation.
This benefit is in relation to utilizing judicial comity as a solution (discussed below).
While judicial comity relies on judges’ efforts to create a solution that has minimal effect on
them or their courts (and may even be harmful considering the jurisdiction has more control over
the operation of foreign corporations within its borders given the increase in multijurisdictional
litigation), forum-selection clauses can be implemented by corporations without relying on any
outside actors (assuming their validity).
ii.
Disadvantages to Forum-Selection Clauses
A.
Backlash From Other States, Regulators and Lawyers
Delaware is the pinnacle of U.S. corporate law, and as Thomas notes, a “strong push by
Delaware for such clauses [essentially ensuring litigation in Delaware for deal cases arising out
of the public companies incorporated in the state] may spark a backlash from other states, federal
regulators, and plaintiffs’ lawyers.” Such a backlash, suggests Thomas, may have negative
consequences for Delaware in the future. For example, if jurisdictions outside Delaware “refuse
to hear cases involving Delaware corporations, . . . [it may] discourage companies from initially
incorporating in Delaware.”
While this argument seems logical, I do not see much of a threat to Delaware in this
regard. First, as stated earlier, states other than Delaware have an interest in hearing cases
regarding foreign corporations operating within their borders. This suggested boycott by outside
states over one clause in a generally long and complex corporate charter seems infeasible.
Further, should the boycott occur, I do not anticipate it would have much effect on the number of
corporations incorporating in Delaware. Corporations incorporate in Delaware for many
reasons, including its superior business courts, sophisticated bar, the Delaware General
Corporate Law statute, efficient case management, and vast body of case law. I have doubts that
other states’ refusals to hear cases regarding Delaware corporations would affect the number of
businesses incorporating in Delaware given most corporations’ desire to litigate in Delaware.
B.
Potential Constitutional and Federalism Issues
Our federal society allows plaintiffs to select in which forum to bring a lawsuit. As
Thomas notes, “citizens invoke the general jurisdiction of state courts to sue defendants over
whom that court has personal jurisdiction,” and federal courts use diversity jurisdiction “to avoid
a perceived hometown bias.” Thus, allowing corporations to insert such clauses into their
bylaws or charter essentially circumvents our current federal system of forum selection, which
strikes a balance between which party has influence over the eventual forum selection. Thomas
notes that it would essentially “permit defendants to funnel all cases into sympathetic state courts
in the state of the corporation’s headquarters,” and further that refusing plaintiffs an opportunity
to choose the forum location and further limiting the case to state court deprives the plaintiff
“access to federal courts as a response to possible home-court discrimination.”
C.
Plaintiffs’ Lawyers Will Attempt to Circumvent Forum-Selection
Clauses
Thomas suggests that if this proposal were implemented, “plaintiffs’ lawyers would
undoubtedly look for ways around these forum-selection clauses, perhaps by choosing to file
alternative claims in other states’ courts or purely federal claims in the federal courts.” This
would complicate the relatively standard nature of deal litigation, and further increase costs by
forcing litigation over collateral issues such as whether “the clauses impinge on shareholders’
fundamental right to enforce directors’ and officers’ fiduciary duties.”
Further, widespread adoption of forum-selection clauses and plaintiff’s attorneys’ desire
to circumvent them may lead to a disruption of Delaware’s corporate law prominence. For
example, Thomas warns that should the circuit courts disagree as to whether Delaware should
have the ability to allow corporations to force M&A litigation in its own state, the “U.S.
Supreme Court could get involved, with unpredictable consequences for Delaware’s continued
quasi-monopoly in corporate law.”
D.
Substantive Invalidity under Corporate Law
The forum-selection clauses, though seemingly valid under applicable contract law, may
be subject to certain corporate law challenges. First, Chancellor Laster of the Delaware
Chancery Court has advocated for such clauses as a solution to the problem of multijurisdictional
deal litigation. However Thomas notes that Laster “expressly referred to action by both
‘directors and shareholders’ in adopting ‘charter’ provisions.” This suggests that, absent express
shareholder approval of the provision, courts may find that a restriction on plaintiff shareholders’
ability to bring a case in their forum of choice is invalid. It also decreases the solution’s
desirability in the eyes of management, as one major benefit of this solution is that it is quick and
relatively painless. However, Thomas notes that if shareholder approval is required for the
clause to be valid, the board would have to present the clause to the shareholders in a proposed
charter amendment and risk “the potential embarrassment of having their shareholders vote [it]
down.”
Professor Thomas cites Galaviz v. Berg to support the proposition that the “contract
analogy is unsupported because the directors’ bylaw lacked the requisite mutual consent.” While
this case “does not[] decide whether the adoption of [the company’s] venue bylaw was within the
directors’ powers as a matter of Delaware law,” it does hold that the company “failed to show
that its bylaw is effective under federal law to limit these plaintiffs’ right to bring these claims in
this Court.” The Galaviz court reasoned that “the venue provision was unilaterally adopted by
the directors who are defendants in this action, after the majority of the purported wrongdoing is
alleged to have occurred, and without the consent of existing shareholders who acquired their
shares when no such bylaw was in effect,” and proceeded to deny the defendant-corporation’s
motion to dismiss for improper venue. However, the court did mention that “parties may enter
into contracts—including those where elements of adhesion exist—that contain legally
enforceable forum selection clauses,” therefore retaining the possible of validity of shareholderapproved forum-selection clauses. Thus, this case is evidence that plaintiffs may be able to find
ways to circumvent the effect of unilaterally-adopted forum selection clauses, at least when the
provision is adopted unilaterally by the board of directors.
Though it seems shareholder-approved charter provisions provide the mutual consent
needed to validate a forum selection provision, shareholders still face massive collective action
problems. For example, “[w]hile a shareholder vote provides some protection to investors, . . .
shareholder approval of charter amendments does not necessarily mean the amendments increase
shareholder wealth.” Even with organizations like ISS providing assistance and advice to the
shareholders as a group, collective action issues may still plague the shareholder voice.
E.
Lock-in Effect
Finally, single-forum forum-selection clauses effectively “lock in” the litigation forum.
Thus, while Thomas notes that Delaware “currently do[es] an excellent job balancing investor
and management interests, this could change, leaving shareholders without effective recourse for
management wrongdoing.” Furthermore, Thomas notes that multi-forum forum-selection
clauses that allow management the choice of multiple forums have two problems. First, they
effectively do nothing more than allow forum shopping by defendants. “Why should we
privilege defendants to choose the forum for shareholder litigation rather than plaintiffs?”
Second, they allow for the possibility that defendant-corporations “hold up” the Delaware courts,
essentially bargaining for more favorable outcomes in return for more suits brought in the state.
b.
Comity—Tweaking the Current System
A second potential solution proposed by Thomas to the problems associated with
multijurisdictional litigation is to tweak the current system of judicial comity. The Delaware
Chancery Court, as the primary court in many multijurisdictional deal cases, already has
experience with this solution. As Thomas notes:
Chancellor William Chandler of the Delaware Chancery Court developed a practice
in multijurisdictional deal litigation of contacting the other judge(s) in courts with
pending litigation from the same transaction to discuss which forum was the most
appropriate for the litigation to proceed. If practiced effectively by judges and
agreed to by counsel, multijurisdictional cases can be litigated in one forum.
The appeal of this system is that judges can, pursuant to certain factors, decide between
themselves which forum is most appropriate to hold the litigation. Such factors may include
“their courts’ docket backlog, their subject matter expertise, the relative quality of the cases filed,
the attorneys’ ability to effectively pursue the litigation, and their jurisdiction’s interest in the
defendant-corporation’s affairs.” An additional factor mentioned earlier in this paper is a court’s
interest in interpreting its own state’s law. For example, a novel issue or a point of corporate law
that is relatively unsettled in Delaware may be better handled by the Court of Chancery as to
provide guidance to other courts attempting to interpret Delaware law.
i.
Problems with Judicial Comity
Before a system of judicial comity is broadly utilized, Thomas suggests that it is
important to consider two issues: First, the success of this approach requires the voluntary
participation by the judges in each form in which the litigation has been filed. A specific judge’s
personal or situational motives could play a part in derailing the cooperation needed to make this
solution work effectively. Thomas notes that “if a particular judge wants to preside over a highprofile case,” it may “result in diverting cases inefficiently.” He further warns that even if judges
attempt to bring the litigation in the most beneficial forum, they may not agree on the application
of the factors or which forum is ultimately best, and “there is no surefire policing mechanism.”
These are important considerations, given that judges from different jurisdictions have different
backgrounds and are influenced by sometimes conflicting incentives. While Thomas pays this
issue lip service, I view it as the largest potential roadblock to an otherwise simple and costeffective solution. I am not sure whether specific action can be taken to reduce the risk that
judicial opposition derails this solution, but I am convinced it is comity’s principal hurdle.
Second, Delaware has a unique interest in interpreting its own laws. As Thomas notes,
the rest of the country (and world) look to Delaware for the cutting edge in corporate law, and
that gives Delaware a legitimate interest “in the consistency of its law, which may suffer injury if
other states’ courts take license with it.” This can be used as leverage to convince non-Delaware
judges to allow the litigation to proceed in Delaware. In fact, Leo Strine has weighed in in favor
of judicial comity, but advocates for the application of a “rebuttable presumption that the
litigation should proceed in the courts of” the state whose law is to be applied unless “compelling
circumstances relating to other parties’ interests or some supervening public interest may justify”
allowing the case to proceed in a sister jurisdiction.
Strine justifies his position in favor of the rebuttable presumption by arguing that it, inter
alia, “promotes the growth of precedent to guide future transactions, . . . enhances judicial
accountability, . . . and ensure[s] that corporate representative litigation better serves the interests
of stockholders.” Of course, competing with Delaware’s interest in its law’s consistency is the
interest of sister states in governing the actions of foreign corporations operating within their
borders. Finding a balance between these competing interests may be easier said than done when
judges begin discussing and applying the above comity factors.
ii.
Benefits of Judicial Comity
The most notable benefits of judicial comity indicated by Thomas are its “relatively lowcost, easily reversible policy approach that does not require any remarkable changes to the
current system.” Further, if a majority of the judges involved in such litigation are able to
effectively collaborate and efficiently ascertain the most appropriate jurisdiction to host the
litigation, the problems associated with multijurisdictional litigation will largely subside. This
approach does not require much in terms of fixed costs up front, it can be easily reversed, and it
is simple. Therefore, despite its potential difficulties, Professor Thomas suggests that it is “likely
the best solution.”
Thomas looks to an article written by Griffith and Lahav in the Vanderbilt Law Review
for suggestions concerning how to improve the current system. These suggestions include
increasing the accessibility of the Delaware Court of Chancery’s decisions, having the
defendants in each case provide notice to each judge concerning the multijurisdictional nature of
the litigation “since defendants are in the best position ‘to provide the judges in each jurisdiction
with a copy of the related complaint filed elsewhere,’” and “creating a means for sister states to
formally certify questions to the Delaware Chancery Court.”
Therefore, while forum-selection clauses are a potential solution to the problems and
increased costs associated with multijurisdictional litigation, Thomas suggests that the current
system of judicial comity, with a few tweaks, may be the most practical and effective solution.
Though I agree that this solution, if implemented carefully, can provide a cost-effective solution
to the problem, I argue that its hurdles may prevent such flawless implementation. For example,
judges will have to objectively and consistently apply the comity factors and disregard large
incentives to hear the case in their own jurisdiction, while forum selection clauses are
implemented by the very corporations incentivized to do so.
Conclusion
Thomas’s article effectively outlines current trends in multijurisdictional M&A litigation:
Although data quantifying the costs associated with such litigation is scarce, it is likely that
plaintiffs challenging the same transaction in multiple forums increases the defendantcorporation’s costs of defending such claims. What data we have suggests that although the
number of cases being challenged has remained stagnant, the number deals have decreased
indicating a higher percent of deals being challenged. This trend may be a result of the fixed
capacity of the plaintiffs’ bar and has resulted recently in an increased percentage of disclosure
violation complaints. This shift is an indication that the quality of suits filed by the plaintiff’s
bar is in decline, and Delaware’s hard-nose approach to handling such cases may be a cause of
the recent increase in multijurisdictional litigation.
Thomas then discusses two potential solutions to this trend: Forum-selection clauses and
comity. Forum selection clauses allow the defendant-corporation to select the litigation venue,
essentially shifting the plaintiff’s ability to forum shop to the defendants. While this solution
may be accepted widely in the future, it is plagued by enforceability issues and a slow adoption
rate.
Judicial comity, as Thomas suggests, may be a more practical and efficient approach to
address the issue. It would be relatively inexpensive to implement and would avoid most of the
incremental costs associated with filings in multiple jurisdictions. Slight tweaks may be needed
to avoid issues such as judges disagreeing about the appropriate venue and the inconsistent
application of Delaware law, but if properly implemented comity is an effective and efficient
solution.
However, I anticipate that comity will be more difficult than suggested to implement
given the conflicting incentives imposed on judges of different states. Therefore, I suggest
focusing on forum-selection clauses as an ultimate solution, given its apparent validity in
corporate charters and that corporations themselves have an incentive to correct the recent trend
toward increased disclosure-based complaints and settlements.