In what has been a familiar trend in courts around the country, shareholders of public companies have increasingly brought putative class actions challenging publicly announced mergers and acquisitions. These class actions, in which the named plaintiffs purport to represent the interests of all shareholders of the acquired company, typically allege that the agreed upon deal price is too low, that the process used to reach the deal was unfair, and that the disclosures in the proxy or tender offer materials are inadequate.
These lawsuits are typically filed within days of the announced merger. According to a recent study, in 2012 alone, 93 percent of all deals valued over $100 million were subject to merger challenge lawsuits, with an average of 4.8 lawsuits filed per deal. Often, these suits are resolved quickly in “disclosure settlements” in which some additional disclosures about the transaction are made and plaintiffs counsel petition the court for a six-figure fee. As discussed below, a recent decision by the Superior Court, while nonprecedential, makes Pennsylvania a much less hospitable venue for such settlements, which strongly suggests that plaintiffs firms will choose to file elsewhere.
Although the earliest merger challenges were typically brought in the Delaware Court of Chancery—given that a majority of public companies are incorporated in Delaware—over time, the Chancery Court has expressed its skepticism about these types of actions. This has led a number of plaintiffs firms to file their complaints against Delaware corporations in Pennsylvania and other states’ courts. However, a nonprecedential opinion from the Allegheny County Court of Common Pleas that was recently affirmed by the Superior Court may lead plaintiffs lawyers to rethink the strategy of bringing these suits in the Pennsylvania courts.
In Curnow v. Pfischner, Apr. 18, 2012 (Ct. Com. Pl. Allegheny County), shareholders of Parkvale Financial Corp. filed a class action challenging the company’s announced merger with FNB Corp. Shortly after filing the action, the parties reached a settlement that resulted in Parkvale making additional disclosures through a supplemental filing with the Securities and Exchange Commission and acknowledging that plaintiffs counsel was entitled to a fee award.
Because the lawsuit was a putative class action, court approval of the settlement was required. The court denied the plaintiffs’ motion for preliminary approval, citing Pennsylvania law that requires that class action settlements must secure an adequate advantage for the class in return for their surrender of rights. The court concluded that the proposed disclosure settlement would have benefited “only plaintiffs counsel and defendants to the disadvantage of the class.” In particular, the court found that additional disclosures had “nothing to do with the allegations [in the complaint] supporting a contention that the price was inadequate because of defendants’ alleged breaches of their fiduciary duties.”
In an effort to avoid the preclusive nature of the court’s opinion regarding the lack of benefit to the class, the plaintiffs voluntarily dismissed their putative class claims and made a motion for attorney fees on behalf of named plaintiffs under the common-law substantial benefit doctrine. The trial court denied that request, and in a nonprecedential opinion issued last month, the Superior Court affirmed, in Curnow v. Pfischner, Jan. 6, 2014 (Sup. Ct.). The Superior Court held that Pennsylvania had not adopted the common benefit doctrine—either by statute or in the common law—and thus courts may not award attorney fees where no monetary relief is obtained for the class.
These two decisions, although nonprecedential, stand as a warning to plaintiffs hoping to litigate corporate merger challenges in Pennsylvania and achieve a quick resolution in exchange for nonmonetary relief. More broadly, the Superior Court’s rejection of the common benefit doctrine suggests a strong defense to equitable arguments regarding the potential for recovery of attorney fees in class and individual actions where the right to fees is not specifically mandated by contract or statute.
Steven A. Reed is a partner in Morgan, Lewis & Bockius’ litigation practice and co-chair of the antitrust litigation group, resident in Philadelphia. He focuses his practice on securities, corporate governance and antitrust litigation. He has represented leading companies in a wide variety of industries.
Jason H. Wilson is an associate in the firm’s litigation practice, resident in Philadelphia. His practice focuses on securities and shareholder litigation and corporate governance issues, including defending shareholder class actions brought under the federal securities law and derivative suits.