Opinion

Alison Frankel

Forum selection clauses are killing multiforum M&A litigation

Alison Frankel
Jun 24, 2014 21:00 UTC

It was entirely predictable that last spring, after Safeway announced that it had agreed to accept a $9.2 billion offer from the private equity firm Cerberus Capital, shareholders would rush to file suits challenging the deal. As you know, shareholder M&A suits have become an inevitable consequence of merger announcements, and, to the frustration of defendants, are often brought in more than one jurisdiction — which has meant, in years past, that if defendants couldn’t persuade judges to defer to other courts, they sometimes had to defend against the same claims by multiple plaintiffs firms in multiple courts.

Defendants thought they’d at least solved the multiforum problem a year ago, when then Chancellor Leo Strine ruled in Boilermakers v. Chevron that corporations may adopt and enforce bylaws requiring shareholders to bring suits in Delaware. The plaintiffs firms that had challenged bylaws adopted by Chevron and Fedex decided not to appeal Strine’s decision to the Delaware Supreme Court, though the state justices may yet have a say on Chevron’s forum selection clause via a parallel shareholder suit that was filed in federal court in San Francisco. (U.S. District Judge William Alsup has said he may certify the bylaw validity to the Delaware Supreme Court in that case.) Under prevailing Delaware precedent, the only way forum selection bylaws wouldn’t work for Delaware corporations was if judges in other jurisdictions refused to honor the provisions.

So far, all of the out-of-state judges to consider Delaware forum selection bylaws have deferred to the provisions — with the California state judge presiding over a wing of the Safeway litigation the latest to rule that a forum bylaw is enforceable. (Sullivan & Cromwell has a client alert describing all four decisions; I first heard about the S&C memo from The Chancery Daily.)

The California ruling, by Judge Wynne Carvill of Alameda County Superior Court, is particularly good news for Delaware corporations that have adopted or are contemplating a forum selection bylaw amendment directing shareholder litigation to Chancery Court. And now lawyers for Safeway and Cerberus are using it to try to erase yet more Safeway shareholder M&A class actions in federal court. It’s worth paying attention to what happens next in this case: If the Safeway shareholder litigation turns out to be a paradigm of M&A class actions in the age of forum selection clauses, plaintiffs lawyers are going to be collecting less in deal taxes than they’re accustomed to.

Safeway’s board adopted its forum selection bylaw amendment in October 2013, after the company began exploring a sale but before any agreement with Cerberus. That deal was announced on March 6, and, almost immediately, seven shareholders sued in Delaware and four others in Alameda County. The Delaware cases were consolidated before Vice-Chancellor Travis Laster, who appointed Bernstein Litowitz Berger & Grossmann, Grant & Eisenhofer, Kessler Topaz Meltzer & Check and Saxena White as lead counsel (with another four firms as members of an “executive committee”). Safeway agreed to expedited discovery in the Delaware litigation.

Will old M&A class settlements tank private equity collusion case?

Alison Frankel
Jan 29, 2014 20:08 UTC

In his latest update on class actions filed in the wake of deal announcements, Dealbook’s Deal Professor Steven Davidoff (whose day job is teaching law at Ohio State) found that in 2013, shareholder suits followed almost all – 97.5 percent – deals of more $100 million. That’s not quite as inevitable as night following day but it’s getting there, especially when you consider that the rate of post-M&A class action filings is up from 91.7 percent in 2012 and 39.3 percent in 2005. Companies grumble all the time that these suits are nothing more than a “deal tax,” a sort of legal extortion racket by plaintiffs lawyers whose true motive is not enhancing shareholder value but skimming millions in fees for holding up transactions with silly claims.

Regardless of the merits of that argument, I’m sure that when shareholders in seven companies acquired by private equity funds in the early 2000s settled M&A class actions, they never imagined that those settlements could come back and complicate a completely different case. Nor could the settling defendants have imagined that their deal-tax settlements could very well shield them from facing an antitrust collusion class action and its attendant treble damages.

That would be the unintended consequence of M&A shareholder settlements if U.S. District Judge William Young of Boston agrees with Bain Capital, Blackstone, KKR, Goldman Sachs and two other private equity firms that former shareholders in eight companies that changed hands in leveraged buyout deals cannot be certified as a class because of broad releases by shareholders in seven of the deals. In their recently filed brief opposing class certification, the private equity defendants assert that the previous judge in the case, now retired Edward Harrigan, already ruled that shareholders who sold stock in the various deals cannot introduce evidence from those transactions against defendants they released from liability in M&A settlements. As a result of that ruling, the private equity funds argue, the plaintiffs’ evidence of the funds’ alleged overarching collusion to suppress prices is a patchwork, with different plaintiffs permitted to make claims against different defendants in different deals, all depending on which plaintiff released which defendants in which LBO.

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