In the second panel of the PLUS D&O Symposium, the panelists discussed the recent rise in litigation following mergers and acquisitions.  One panel member recalled that around 84% of M&A deals result in litigation, with an average of five lawsuits filed in each case.  It was noted that the top plaintiff’s firms conduct due diligence to see if there is a significant conflict on the target company’s board or with an adviser.  Other plaintiff’s firms simply file quickly, and later identify trivial items that should have been disclosed in the proxy statement.  These lawsuits name the target company, the target’s board, and the acquirer as an aider and abettor of the target’s fiduciary duty violations.  Increasingly, suits will also name a third party, such as an investment bank that advised the target’s board.

The panel found that many of these lawsuits — possibly a majority — are settled via “disclosure-only” settlements (i.e., the settlement merely obligates the defendants to disclose certain additional items in the proxy statement, and the plaintiff’s lawyers then apply to the court for fees).  Some panel members suggested that it was the significant increase in fees awarded in these types of cases several years ago that led to the increase in the cases filed.  Furthermore, some panel members also believe that the fragmentation of the plaintiff’s bar has forced the smaller firms to file M&A suits in order to generate fees.

The panel noted that courts have tried to stem the tide of these types of litigation by limiting fees, particularly in weaker, “disclosure-only” cases, and that the Delaware chancery court in particular has been tough on fees.  The panel also noted that the Delaware chancery court has provided guidelines on fees in an attempt to send a message to other state courts to follow suit, so as to discourage forum shopping.

The panel pointed out that the problem from the perspective of an insurer is that this type of litigation is so widespread, that there is no way to identify the more vulnerable companies.  In addition, some panel members believe that these types of claims were so integrally related to D&O coverage that they could not be weeded out through application questions or made the subject of exclusions.  One panel member suggested that deductibles could be used as a means of mitigating exposure.  The panel also found that defense costs mount quickly because these cases move on a fast schedule as the insured attempts to arrive at a settlement in order to avoid an injunction.

Some panelists predicted that the reductions in fees for “disclosure-only” settlements will reduce the frequency of these lawsuits to more manageable numbers, but that these types of suits will not go away.