The Market for Preclusion in Merger Litigation

Article excerpt

INTRODUCTION

Delaware dominates the corporate law market.1 More than half of all public companies and over sixty percent of the Fortune 500 are incorporated in Delaware.2 These companies are subject to Delaware's corporate law regardless of where their businesses are physically located. Although academics continue to debate whether it is good or bad,3 they have long agreed that Delaware's dominance is a result of its law and its judiciary.4 As a corollary, it was widely understood that Delaware courts decided most cases involving Delaware corporations.5

The discovery that litigation involving these corporations very often takes place outside of Delaware therefore came as something of a shock.6 Recent research shows that more cases are filed against Delaware corporations in other states than in Delaware itself.7 As practitioners have long lamented, not only are companies sued in connection with every major merger or acquisition transaction, it now appears that they are sued multiple times in multiple places; increasingly, these cases are resolved outside of Delaware.8 As a forum for corporate litigation, Delaware no longer dominates.

The out-of-Delaware trend in corporate litigation could be significant for corporate law. Delaware corporate law is largely judge made.9 The Delaware statute is famously enabling, providing for maximum flexibility in the design of governance arrangements.10 Judges set the outward bounds of this flexibility by applying general principles of fiduciary duty to guard against opportunistic conduct in particular transactions.11 The accretion of precedent from these cases forms the true substance of Delaware corporate law. Shaken from their settled understandings, academic commentators have sounded the alarm that fewer cases decided in Delaware could, over time, reduce the expertise of the Delaware judiciary in corporate law matters.12 Worse, others have argued, the decisions reached by non-Delaware "dilatants" threaten to adulterate and degrade the basic Delaware product.13 In sum, prior commentary on the out-of-Delaware trend has treated it as very bad for corporate defendants,14 very bad for shareholder plaintiffs,15 and very bad for Delaware.16

We don't see it that way. In our view, the out-of-Delaware trend has awakened an active "market for preclusion" in which parties seek to trade the preclusive effect of a judgment in exchange for compensation.17 Multijurisdictional litigation is essential to making this market work since related claims filed in a single jurisdiction can be consolidated,18 but related claims filed in different jurisdictions cannot.19 Multijurisdictional litigation thus creates a market of multiple sellers-that is, competing plaintiffs' counsel in each jurisdiction, each of whom has the power to settle.20 Moreover, thanks to the operation of the Full Faith and Credit Clause of the U.S. Constitution,21 the first settlement approved by a court precludes all other claims relating to the same underlying matter.22

The preclusive effect of settlement creates enormous value for the defendant. Without it, defendants' planned transactions will be burdened by potentially large contingent liabilities and may even be enjoined. Upon reaching a preclusive settlement and resolving all shareholder claims, the transaction can move forward to closing. The market for preclusion facilitates the transfer of this valuable commodity. When it is working well, this market provides a reliable price-discovery mechanism for shareholder claims, allowing low-value claims to settle quickly and cheaply while higher-value claims are litigated more aggressively.

Most prior commentary focuses on eliminating duplicative multijurisdictional merger litigation through consolidation or centralization.23 Our contrarian account of the out-of-Delaware trend seeks both to identify overlooked benefits of the present system and also to gain a clearer understanding of its flaws. Reframing multijurisdictional litigation as a market process illuminates the core concern of agency costs; in doing so, we point the way to policy choices that are more consistent with the basic structure of federalism than an approach focusing on consolidation or centralization. …