DealLawyers.com Blog

You know how one of the big trends in M&A litigation in recent years has been its migration from state to federal courts? This Woodruff Sawyer blog says that there’s some traffic heading in the other direction – at least when it comes to stock deals. Apparently, several plaintiffs have recently brought claims under Section 11 of the Securities Act in state courts against buyers in stock-for-stock mergers.

Bringing ’33 Act claims in state courts has become a bit of a cottage industry in recent years, and that industry got a boost from the Supreme Court’s Cyan decision, which upheld state court jurisdiction over ’33 Act claims. Those claims have typically arisen in connection with IPOs, but this excerpt says several state court Section 11 actions have been filed in connection with M&A deals:

Until now, we’ve considered Section 11 cases filed in state court to be mostly a problem for IPO companies. That’s because IPO companies don’t typically have a lot of shares trading other than the shares issued pursuant to the registration statement. For that reason, it’s not hard for plaintiffs to be able to trace back IPO company shares (including shares issued in a follow-on offering pursuant to a registration statement shortly after the IPO) to a registration statement. However, it’s much harder to do that for the more mature public companies since there are a lot of shares in the float, making the tracing requirement to a particular registration statement much harder to meet.

But we’ve now seen in the data Section 11 suits brought by plaintiffs in state court against three different mature public companies:

– Micro Focus International. Ribeiro v. Micro Focus International. (County of San Mateo, Calif.; filed March, 28, 2018.)
– Dentsply Sirona, Inc. (formerly Dentsply International, Inc.). Castronovo v. Dentsply Siorna, Inc. et al (County of New York; filed June 7, 2018.)
– Colony Capital, Inc. Two suits in two separate states. Bumgardner v. Colony Capital (County of Los Angeles; filed July 5, 2018) and Houser v. CenturyLink, Inc. (County of Boulder, Colo.; filed June 12, 2018.)

The reason is mergers and acquisitions. In each case, the buyer used its stock as currency and issued shares to the seller shareholders pursuant to a registration statement. Then the stock price declined below the registration statement price.

As the excerpt notes, one of the traditional problems plaintiffs in a Section 11 case have had to overcome is the need to trace their shares to a particular registration statement. But cases in which the buyer’s stock drops shortly after a merger involving the issuance of registered shares make it easier for the target’s shareholders to satisfy this requirement.

Companies finding themselves (and their directors) as defendants in state court ’33 Act cases face some real disadvantages in comparison to federal court defendants. The blog points out that the pleading standards are often lower and there’s no automatic stay pending a dismissal motion as there is in federal court actions subject to the PSLRA. While the impact on M&A litigation remains to be seen, these disadvantages have led to higher settlement payments in state court IPO cases.

– John Jenkins