These days, class action securities fraud filings are continuing at a record pace. The 2016 disclosure-only settlement rejection by the Delaware Court of Chancery, traditionally a favorable location for defendants, has done little to limit company risk; instead, plaintiffs have proceeded to file in other state and federal courts, causing companies to consider additional legal scenarios as they try to limit their exposure.

According to Robert Long, partner and leader of Alston & Bird's Securities Litigation practice, merger litigation filings in federal court have more than tripled since this time last year.

“The fact that plaintiffs are considering more venues when they look to file their suits only complicates a company's outlook because courts outside of Delaware may offer their own interpretations of when plaintiffs have stated a claim that can go forward in the merger litigation context, even if Delaware law should apply,” he explained to Inside Counsel in a recent interview. “Companies must ask questions like 'Where is my merger target incorporated?' or 'Does my current strategic plan increase my exposure?' to evaluate a range of scenarios that may invite additional lawsuits.”

Long has some theories as to why class action securities fraud filings are continuing at a record pace. First, plaintiffs' lawyers who spent a substantial part of their practice litigating merger suits in Delaware have needed to find other jurisdictions and theories. Second, there is a new generation of law firms that are trying to fill the void left by the breakup of Milberg Weiss about a decade ago. Third, there is more volatility in the market as the market has risen rapidly, and finally, plaintiffs' lawyers are willing to take on smaller fish.

“We will see whether Delaware's refusal to continue to entertain the garden-variety disclosure-only settlements leads to limits in company risk over the long run. It might,” he said. “But in the short run, it most likely punishes good actors and rewards bad actors.”

The good actors—those looking to do a good-faith merger process—are now facing merger suits in courts that are not used to dealing with them.  They will be forced to settle for perhaps even larger amounts than they would have in Delaware, where at least the companies knew the courts would understand their situation. The bad actors–those who might actually be using improper methods to achieve a business transaction–are less likely to be caught because the courts that do not do this sort of litigation all the time won't easily recognize bad conduct.

“Typically, if the plaintiffs aren't going to file in Delaware (which is the most common state of incorporation), then the plaintiffs must file in the corporation's principal place of business,” he said. “The plaintiffs' counsel can only use so much strategy in that.”

Long shared some questions that companies should ask about their strategic plans to minimize their exposure to merger objection filings: Does their headquarters jurisdiction (particularly the federal courts in their jurisdiction, assuming they are incorporated in Delaware) have plaintiff-friendly case law?  If not, can they institute forum selection clauses? Does their D&O insurance cover merger lawsuits? And, is there a significant retention (deductible) on the policy?

These days, class action securities fraud filings are continuing at a record pace. The 2016 disclosure-only settlement rejection by the Delaware Court of Chancery, traditionally a favorable location for defendants, has done little to limit company risk; instead, plaintiffs have proceeded to file in other state and federal courts, causing companies to consider additional legal scenarios as they try to limit their exposure.

According to Robert Long, partner and leader of Alston & Bird's Securities Litigation practice, merger litigation filings in federal court have more than tripled since this time last year.

“The fact that plaintiffs are considering more venues when they look to file their suits only complicates a company's outlook because courts outside of Delaware may offer their own interpretations of when plaintiffs have stated a claim that can go forward in the merger litigation context, even if Delaware law should apply,” he explained to Inside Counsel in a recent interview. “Companies must ask questions like 'Where is my merger target incorporated?' or 'Does my current strategic plan increase my exposure?' to evaluate a range of scenarios that may invite additional lawsuits.”

Long has some theories as to why class action securities fraud filings are continuing at a record pace. First, plaintiffs' lawyers who spent a substantial part of their practice litigating merger suits in Delaware have needed to find other jurisdictions and theories. Second, there is a new generation of law firms that are trying to fill the void left by the breakup of Milberg Weiss about a decade ago. Third, there is more volatility in the market as the market has risen rapidly, and finally, plaintiffs' lawyers are willing to take on smaller fish.

“We will see whether Delaware's refusal to continue to entertain the garden-variety disclosure-only settlements leads to limits in company risk over the long run. It might,” he said. “But in the short run, it most likely punishes good actors and rewards bad actors.”

The good actors—those looking to do a good-faith merger process—are now facing merger suits in courts that are not used to dealing with them.  They will be forced to settle for perhaps even larger amounts than they would have in Delaware, where at least the companies knew the courts would understand their situation. The bad actors–those who might actually be using improper methods to achieve a business transaction–are less likely to be caught because the courts that do not do this sort of litigation all the time won't easily recognize bad conduct.

“Typically, if the plaintiffs aren't going to file in Delaware (which is the most common state of incorporation), then the plaintiffs must file in the corporation's principal place of business,” he said. “The plaintiffs' counsel can only use so much strategy in that.”

Long shared some questions that companies should ask about their strategic plans to minimize their exposure to merger objection filings: Does their headquarters jurisdiction (particularly the federal courts in their jurisdiction, assuming they are incorporated in Delaware) have plaintiff-friendly case law?  If not, can they institute forum selection clauses? Does their D&O insurance cover merger lawsuits? And, is there a significant retention (deductible) on the policy?