Explaining the Different Propensities to Litigate in Takeovers in the UK and US

• Author: Sarah Morley
• Position: PhD Candidate Durham University
• Pages: 184-202

© 2017 Sarah Morley and Dublin University Law Society

EXPLAINING THE DIFFERENT PROPENSITIES TO

LITIGATE IN TAKEOVERS IN THE UK AND US

SARAH MORLEY*

Introduction

In their recent study Cain and Davidoff Solomon found that eighty-seven

point seven percent of takeovers experience litigation in the US.

1

The

litigation is instigated by the shareholders of the target company alleging

that their own directors have breached their fiduciary duty of disclosure.

2

They typically allege that a director has not disclosed all the information

necessary for them to make an informed decision as to whether they

should sell their shares to the bidding company.

3

These claims are

brought as class actions by the target shareholders, and often settle

before they reach trial.

4

In the UK, there is almost no takeover litigation,

* Sarah Morley, PhD Candidate Durham University. The author would like to thank Mr

Chris Riley for his comments on an earlier draft of this article.

1

Matthew Cain and Steven Davidoff-Solomon, ‘Takeover Litigation in 2015’ (Berkeley Law,

2015); As both systems have slightly different procedures for the completion of acquisitions,

‘takeover’ is a general term used in this paper to refer to tender offers and mergers in the

US, and takeover offers and schemes of arrangement in the UK (additionally the focus of

this analysis is limited to the takeover activity of public limited companies). Litigation in

this paper refers to any claim brought during the process of a takeover (ie once a bid or

merger deal has materialised, but before the takeover/acquisition has been completed). It

should be noted that this paper will focus on the state law of Delaware’s Chancery judges

and the Delaware Supreme Court. This is because Delaware serves as the state of

incorporation for more companies, and more public companies, than any other state, and as

such Delaware serves as the model for most corporate law in the US. Delaware’s Court of

Chancery is the forum where many, if not most, of the significant cases concerning

corporate law have been litigated.

2

For reference, a target company is the company which the bidder (the company who

makes the offer to buy the shares) wishes to acquire and takeover. The company is

therefore the target of the takeover. The shareholders of the target company are known as

the target shareholders; This duty is also known as the duty of candor; see also Gantler v

Stephens, 965 A2d 695 (2009); Rosenblatt v Getty Oil Co, 493 A2d 929 (1985).

3

Lynch v Vickers Energy Corp 429 A2d 497 (1981).

4

See Matthew D Cain and Steven Davidoff Solomon, ‘A Great Game: The Dynamics of

State Competition and Litigation’ (2015) 100 Iowa Law Review 465; CN V Krishnan and

others, ‘Shareholder Litigation in Mergers and Acquisitions’ (2012) 18 Journal of Corporate

Finance 1248; Jill E Fisch, Sean J Griffith and Steven Davidoff Solomon, ‘Confronting the

2017] Takeover Litigation

185

and target shareholders very rarely commence litigation.

5

There is a clear

disparity in litigation rates between the two countries. Whilst it may be

simple to offer a single cause for such disparity, this paper offers four

factors to explain these different propensities to litigate during takeovers.

Part I, and the first explanatory factor, establishes that target

directors in the US owe greater statutory disclosure obligations than

directors in the UK. Whilst directors in the UK owe statutory disclosure

duties, they are less demanding than those imposed on US directors.

More crucially, the US duty of disclosure is owed directly to the

shareholder. This is in complete contrast to directors’ duties in the UK

which are owed only to the company. This point is crucial in

understanding the explanation in Part II, which examines the US target

shareholders’ ability to bring a private right of action – more specifically,

a class action – against their target directors. It is this procedural device,

especially when understood in the context of the rules governing

attorneys’ fees that provides the reservoir feeding the flow of US

takeover litigation.

Part III assesses the role played by the existence of the UK

Takeover Code (the ‘Code’), and its administration by the Panel on

Takeovers and Mergers (the ‘Panel’). It is argued that the existence of

these institutions does much to suppress takeover litigation, including

litigation by target shareholders against target directors. Part IV,

examines ‘litigation culture’, and argues that the existence of the Panel

and the Code in the UK has created a specifically-takeover related culture

in which directors generally behave well and where litigation is rarely

resorted to.

I. Directors’ Statutory Disclosure Obligations

In the US target shareholder litigation often alleges that their target

directors have breached their duty of disclosure.

6

The Delaware courts

have, over time, created a specific fiduciary duty of disclosure owed by

directors to their shareholders.

7

In the UK, there is no such express duty

to disclose. As such, shareholders may only ground a claim in non-

Peppercorn Settlement in Merger Litigation: An Empirical Analysis and a Proposal for

Reform’ (2015) 93 Texas Law Review 557.

5

John Armour and David A Skeel, ‘Who Writes the Rules for Hostile Takeovers, and Why?

– The Peculiar Divergence of US and UK Takeover Regulation’ (2007) 95 Georgetown Law

Journal 1727.

6

Fisch et al (n 4) 598.

7

Armour and Skeel (n 5).