In M&A Litigation, Attorneys' Fees Under Attack?

While companies involved in mergers and acquisitions have experienced a surge in litigation in recent years, three court decisions last month have taken aim at plaintiffs’ attorney fees.

The rulings—two in Delaware and one in Texas—“suggest a trend towards greater judicial scrutiny of ‘disclosure-only’ merger litigation settlements and, in particular, attorneys’ fee awards in such settlements,” according to the latest Morrison & Foerster newsletter.

As Delaware Court of Chancery Chancellor Leo Strine put it in rejecting a $500,000 attorney fee award in In re Transatlantic Holdings Inc., the plaintiffs “achieved nothing substantial for the class . . . . [and] participated in no meaningful way in making sure that the class got something meaningful.”

Lawsuits following the announcement of an M&A transaction haven’t always been so commonplace. But the frequency has shot up since the mid-aughts: where 39.5 percent of deals worth more than $100 million were subject to litigation in 2005, 92.1 percent of them were by 2011, according to a study of 1,117 takeovers by University of Notre Dame finance professor Matthew Cain and Ohio State University law professor Steven Davidoff.

Most of the suits examined by Cain and Davidoff settled (71.6 percent); shareholders were compensated in less than five percent of settlements.

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