The Future of Merger Litigation in Federal Courts?

In January 2016, the Delaware Chancery Court issued its decision in In re Trulia, Inc. Stockholders Litigation, which announced that the court would approve “disclosure only” settlements that had become commonplace in M&A transactions only if the supplemental disclosures provided to a company’s stockholders in connection with those settlements were “plainly material.” Since that decision, the federal courts have seen a dramatic increase in the number of lawsuits challenging the disclosures made in connection with M&A transactions. Cornerstone reported that there were 198 M&A-related lawsuits filed in federal court in 2017, more than double the number that had been filed in 2016. The lawsuits are very similar to those that used to be filed in Delaware Chancery Court prior to Trulia. The complaints assert claims under Section 14 and 20 of the Exchange Act and allege that the disclosure documents filed in connection with M&A transactions are false and misleading because they fail to disclose various pieces of information, typically information about the issuer’s financial projections, analysis performed by the issuer’s financial advisor, and conflicts of interest. Issuers often provide supplemental disclosures to moot the claims, and plaintiffs file notices of voluntary dismissal and seek to negotiate a fee award for causing the supplemental disclosures. These types of federal disclosure lawsuits rarely lead to judicial decisions.

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