Delaware Takes the Lead in Litigation Reform
The Delaware courts are leading the way to cure the problems that litigation critics complain of most. Recent Delaware Court of Chancery decisions are yet another example of that leadership. We begin to show how that is being done, by outlining the perceived problems.
November 28, 2018 at 09:00 AM
7 minute read
Once again, there are demands to reform corporate litigation. (See, e.g., Kevin LaCroix, “Time for Another Round of Securities Class Action Litigation Reform,” The D&O Diary, Oct. 23, 2018.) But once again, the Delaware courts are leading the way to cure the problems that litigation critics complain of most. Recent Delaware Court of Chancery decisions are yet another example of that leadership. We begin to show how that is being done, by outlining the perceived problems.
The critics focus on two types of corporation litigation they claim are serious problems: so-called merger objection lawsuits; and event-driven securities litigation. The principal objection to merger objection lawsuits is that they only allege a proposed merger is improper because the proxy statement asking for stockholders' approval is inadequate, the alleged problem is then “cured” by defendants' immaterial supplemental disclosures and the case is dismissed after the plaintiffs lawyers are paid off with a substantial fee. That seems to be tolerating a strike lawsuit that really accomplished nothing but a fee for the lawyers.
The principal objection to event-driven securities litigation is that they are based on a failure to disclose that the company was subject to a serious risk that eventually occurred, depressing the company's stock price. The critics argue these suits are based on a risk the company did not anticipate and thus could not have disclosed. Thus, such claims lack proof of scienter and again are just lawyer-driven fee generators with fees paid to avoid the costs of defense.
Delaware Addresses the Merger Objection Lawsuit
By 2016, the Delaware Court of Chancery effectively curbed the abuses in merger objection litigation in Delaware. In re Trulia Stockholders Litigation, 129 A.3d 884 (Del. Ch. 2016), held that complaints alleging disclosure violations “cured” by unsubstantial supplemental disclosures did not confer a real benefit on stockholders and did not warrant a fee award. As a result, these suits have virtually disappeared in Delaware courts. Moreover, if the current trend of following Delaware's lead continues in federal court, these merger objection suits may end there too. See, e.g., In re Walgreen Stockholder Litigation, 832 F.3d 718 (7th Cir. 2016).
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