The Shifting Tides of Merger Litigation

In 2015, Delaware made several important changes to its laws concerning merger litigation. These changes, which were made in response to a perception that levels of merger litigation were too high and that a substantial proportion of merger cases were not providing value, raised the bar, making it more difficult for plaintiffs to win a lawsuit challenging a merger and more difficult for plaintiffs’ counsel to collect a fee award. We study what has happened in the courts in response to these changes. We find that the initial effect of the changes has been to decrease the volume of merger litigation, to increase the number of cases that are dismissed, and to reduce the size of attorneys’ fee awards. At the same time, we document an adaptive response by the plaintiffs’ bar in which cases are being filed in other state courts or in federal court in an effort to escape the application of the new rules. This responsive adaptation offers important lessons about the entrepreneurial nature of merger litigation and the limited ability of the courts to reduce the potential for litigation abuse. In particular, we find that plaintiffs’ attorneys respond rationally to these changes by shifting their filing patterns, and that defendants respond in kind. We argue, however, that more expansive efforts to shut down merger litigation, such as through the use of fee-shifting bylaws, are premature and create too great a risk of foreclosing beneficial litigation. We also examine Delaware’s dilemma in maintaining a balance between the rights of managers and shareholders in this area.