Number of M&A deals challenged in state venues more than doubled, as Trulia impact stabilizes.

Shareholders of public target companies challenged 82% of merger and acquisition deals valued over $100 million in 2018, consistent with the previous year, according to a new Cornerstone Research report released. A total of 142 proposed deals valued over $100 million had associated lawsuits in 2018, compared to 115 in 2017, reflecting a parallel rise of M&A activity and shareholder lawsuits during the year.

The report, Shareholder Litigation Involving Acquisitions of Public Companies—Review of 2018 M&A Litigation, also found that the impact of the Delaware Court of Chancery’s decision in 2016 in In re Trulia Shareholder Litigation appears to have stabilized. Increased judicial scrutiny of proposed settlements of stockholder merger litigation culminated in the 2016 decision, which diminished the acceptability of disclosure-only settlements in merger objection cases.

There was an easing of the shift from state to federal courts that began with Trulia, with 49 deals litigated in state courts in 2018, up significantly from 21 in 2017.

In the years before Trulia, shareholders litigated around 90% of M&A deals valued over $100 million. In 2016, the year of the Chancery Court’s decision, that rate declined to 71%. In 2017 and 2018, however, the litigation rate rebounded to 82%, but still was below pre-2015 levels.

“There also was an easing of the shift from state to federal courts that began with Trulia, with 49 deals litigated in state courts in 2018, up significantly from 21 in 2017,” said Ravi Sinha, a Cornerstone Research vice president and coauthor of the report. “The most notable trend at the state level occurred in the Maryland state courts, where 12 deals were litigated in 2018, compared to none in 2017.”

The lower propensity to challenge M&A deals still prevails, according to the report. The number of lawsuits per challenged M&A deal has remained around three since Trulia, compared to the 2009 to 2015 average of 4.7 lawsuits per deal.

In terms of litigation outcomes, the rate of resolution prior to deal closing has declined steadily from 68% in 2012 to a 10-year low of 33% in 2018. Also, 70% of M&A litigation was voluntarily dismissed in 2018, down slightly from 72% in 2017. Between 2009 and 2015, the annual rate of voluntary dismissal was 30% or lower.

Key Findings

• The Third Circuit was the most active federal court in 2018, with more than twice the number of challenged M&A deals compared to the previous year.

• For Delaware-incorporated targets, plaintiffs filed in Delaware for only 13% of challenged M&A deals.

• In 2018, only 45% of challenged M&A deals were litigated in one jurisdiction only, a five-year low.

Read the report, Shareholder Litigation Involving Acquisitions of Public Companies—Review of 2018 M&A Litigation.