Fee Shifting Bylaws and the "Supporting" Rational (Part 2)
What about the rational of the Chamber for opposing fee shifting bylaws? Lets focus on the rational provided in a recent WSJ editorial written by the head of the Chamber's Institute for Legal Reform.
Here again the concern is not expressed as an interested in insulating directors from bad behavior but from cutting off excessive litigation.
In this editorial, the excessive litigation concern arose out of the number of suits filed in connection with mergers and acquisitions. According to the editorial, suits have been filed in "90% of all corporate mergers and acquisitions valued at $100 million since 2010." The litigation was described as efforts by "small, pirate-like investors" having the goal of forcing "a big settlement by holding the deal hostage."
The approach has a number of problems. First, fee shifting bylaws are not limited to merger cases but apply to any action brought against corporations or directors. The editorial makes no effort to assess the impact on these actions.
Second, the editorial uses pejorative labels in place of analysis. The analysis makes it sound like all actions brought in the merger area are designed to hold deals hostage. Yet these suits do no such thing. Courts do not let them interfere with closings. Relief before the closing is routinely denied, forcing the matter to be litigated after the merger has closed. According to Cornerstone, 25% of the cases are not resolved until after the transaction has closed.
Moreover, the commonality of suits provides absolutely no data on the costs and benefits of the actions. Thus, the article makes no mention of the "pirate" firms that obtained, according to Cornerstone, a settlement of $200 against Kinder Morgan in 2010, $89.4 against Del Monte in 2011, and $110 against El Paso in 2012. In 2014, the Chancery Court awarded damages in Rural of $75 million and a settlement was recently announced in connection with Activision for $275 million.
Plaintiffs able to obtain these sorts of settlements or judgments presumably had a stronger case on the merits. Yet given the management friendly nature of the courts in Delaware, many of these actions would presumably not have been filed had they been subject to a fee shifting bylaw. The Editorial makes no effort to assess the overall benefit of these suits or the impact of fee shifting bylaws on meritorious cases.
Perhaps most surprisingly, the Editorial apparently viewed fee shifting bylaws as necessary to reduce the exercise of appraisal rights. Appraisal rights aren't mentioned by name but, according to the Editorial, there are "a small yet sophisticated investor group" who sue "to force higher revaluations of their and any other objectors’ holdings." In these circumstances, the company must either pay them a premium or "fight them and pay as much as 10% or more interest as required under current Delaware law, if they convince a judge their shares should be worth a few cents more."
The reference to "objectors" and interest suggest that the Editorial is referring to appraisal actions. Appraisal actions allows shareholders unhappy with the merger price to petition a court and have a court determine the fair value of the shares. The Editorial apparently views the exercise of this right as a an abuse. It ignores the fact that shareholders doing so take significant risk (they can receive a value less than what was paid in the merger) and can be made to pay the company's costs if filing an action in bad faith.
Moreover, the existence of appraisal rights provides acquirers with an incentive to pay shareholders of the target a price that will minimize the risk that they will petition a court for a determination of fair value. Eliminating the right to bring an appraisal action through fee shifting bylaws will provide an incentive on the part of acquirers to offer lower the price paid to shareholders.
In the end, fee shifting bylaws may allow for lower payments to shareholders in mergers and will shield bad at least some behavior from challenge. These are significant costs. The benefits that outweigh these costs cannot be found in this Editorial.