Mark Twain is famously reported as saying “Reports of my death are greatly exaggerated.” Well, in that respect, he may have been like Yogi Berra (RIP), whose autobiography was titled “I Really Didn’t Say Everything I Said.” A little research yielded Mark Twain’s original note, which was less pithy: “the report of my death was an exaggeration.”
Mark Twain was not alone. Samuel Taylor Coleridge overheard someone talking about a coroner’s inquest into his suicide (by hanging), and responded: “it is a most extraordinary thing that he should have hanged himself, be the subject of an inquest, and yet that he should at this moment be speaking to you.” Many other folks have been the subject of premature death reports, including, many of us remember vividly, Paul McCartney. This seems to be common among musicians — it also happened to Madonna, Lou Reed, Bob Seger, John Mellencamp, Lena Horne, Fats Domino, Alice Cooper, Neil Young (three times), and Gordon Lightfoot (who was at the dentist when he heard of his death). Others in this club include Pope John Paul II (three times), Queen Elizabeth II, Ernest Hemingway (who reportedly read his obituaries every morning with a glass of champagne), P.T. Barnum (at his request, so he could see what people would say about him), Alfred Nobel (who is said to have read in his obit that he was a “merchant of death” and then decided to fund the Nobel Prize), Joe DiMaggio, Bob Hope (twice), James Earl Jones (mistakenly identified when James Earl Ray died), Sean Connery, Steve Jobs, George Soros, Russell Crowe, Ken Kesey (who faked his own suicide to avoid criminal charges), and William “The Refrigerator” Perry (who was watching a Chicago Bears game when he saw a ticker message glide by announcing his death). And don’t forget Abe Vigoda, whose death was reported on at least two occasions, and who, as of today, is 94 years old and has a website devoted to reporting that he remains alive: http://www.abevigoda.com/.
What do Mark Twain and all of these people have to do with securities law? The reports of their deaths were, indeed, premature, as may be the reported death of one of the most enduring securities litigation scams – the “merger tax” litigation.
If you read this blog, you may have seen several discussions of “merger tax” litigation, that cynical sham in which virtually every merger or acquisition is met by a legal challenge regardless of whether there is any reasonable basis for doing so. The legal challenge is not calculated to protect shareholders or increase shareholder value – in fact, it most likely victimizes them and diminishes that value. Instead, it is calculated to delay the completion of the proposed transaction sufficiently to convince the parties to pay the plaintiffs’ lawyers to go away by settling the case for attorneys’ fees and otherwise meaningless non-monetary relief, supposedly for the benefit of shareholders, but actually worthless or even a net cost to them.
This long-standing charade is high on the list of lawyer chicanery that leads the public to view lawyers as among the least honest and most unethical professionals around. In 2013, lawyers were ranked as having high honesty and ethical standards by only 20% of those polled, falling above only TV reporters, advertising practitioners, State officeholders, car salespeople, Members of Congress, and lobbyists, and below 15 other professions (including nursing home operators, who beat lawyers handily). See http://www.gallup.com/poll/166298/honesty-ethics-rating-clergy-slides-new-low.aspx.
The practice of paying the “merger tax” to get rid of worthless legal challenges is the product of greed by unscrupulous plaintiffs’ lawyers, cynical deal-making by defense lawyers and their corporate clients, and “go along, get along” judges, who ultimately have to approve these sham transactions in their role of supposedly protecting the interests of the absent real parties in interest, the shareholders. Unfortunately, most judges in this situation act like potted plants. For reasons that are hard to determine, they accept the sham and, worse, place their judicial imprimatur on the transaction.
In recent months, however, we have reported on repeated judicial decisions to say “No Mas.” We reported on Judge Melvin Schweitzer’s decision to reject a merger tax settlement in Gordon v. Verizon Communications in our Commentary on Abusive State Law Actions Following M&A Deals, which was followed by a post discussing a welcome judicial discussion of the impropriety of “merger tax” cases in City Trading Fund v. Nye: NY Court Flexes Muscles in Rejecting Bogus “Merger Tax” Settlement. And the securities law world has taken note of several recent Delaware Chancery Court cases that excoriate the practice. See Delaware Judge Tells Plaintiff Lawyers: The M&A ‘Deal Tax’ Game Is Over; Game Over?: Del. Chancery Court Rejects Disclosure-Only Settlement in H-P/Aruba Networks Merger Objection Lawsuit; and Transcript of Del. Chancery Court Hearing in Aruba Networks Stockholder Litigation.
On the basis of these developments, we reported that “this sordid practice may be on the wane because judges finally are doing their jobs.” Alas, as with Mark Twain and his comrades in faux-death mentioned above, our reports of the possible impending death of “merger tax” litigation may have been premature.
Witness the settlement proposed just last week in McGill v. Hake, a case brought in the Southern District of Indiana by plaintiffs’ law firms Faruqi & Faruqi and Robbins Orroyo, with local firm Riley Williams & Pyatt. Complicit in this legal atrocity are the defense lawyers — from Sullivan & Cromwell, Jones Day, and Taft, Stettinius & Hollister — as well as their client, Harris Corporation and its directors, but at least they have the excuse that they view themselves as acting in the short term interest of their clients or shareholders.
The complaint in McGill, filed February 12, 2015, was purportedly brought for the benefit of all shareholders of Exelis Inc., and alleged that the acquisition of 100 percent of the shares of Exelis by Harris Corp. was a breach of fiduciary duty because the value offered to Exelis shareholders ($23.75 per share) was “insufficient, as it fails to account for the Company’s significant future earning potential and falls below the premium other defense contractors have recently sold for.” The complaint sought to enjoin the transaction or, if the transaction were completed, damages suffered by the shareholders as a result of the alleged breaches of fiduciary duty. The claims were allegedly “based on information and belief, including the investigation of counsel and review of publicly-available information.” The complaint can be reviewed here: Complaint in McGill v. Hake.
Fast forward to last week. Plaintiff’s counsel filed a motion for court approval of a settlement of the claims. The terms of the settlement: the plaintiff’s lawyers get a payment of $410,000; the shareholders get nothing of value. Instead, the plaintiff’s lawyers negotiated for the defendants “to make certain supplemental disclosures” in a Form 8-K which purportedly “provided Exelis’ shareholders with material information concerning the fairness of the Merger and the Merger Consideration.” Notice that there was no adjustment to the value received by the Exelis shareholders, despite the original contention that the $23.75 value per share was “insufficient.” Instead, more information was provided that supposedly allowed the shareholders to confirm that the value offered was indeed adequate. In short, although the case was supposedly brought to remedy the “insufficient” value given to Exelis shareholders, the only pecuniary benefit provided in the settlement goes to the plaintiff’s lawyers. The motion for approval of the settlement can be reviewed here: Plaintiff’s Motion for Approval of Merger Tax Settlement in McGill v. Hake.
This is a quintessential “merger tax” “disclosure only” settlement. Supposedly convinced that the alleged unfair value was not in fact unfair, the lawyers walk away from the case pocketing the only money transferred. How were they convinced that the value was sufficient? By reviewing materials provided to them that confirmed the fairness of the valuation, and performing so-called “confirmatory discovery” after the deal was done to “confirm” the fairness of the deal. So-called “confirmatory discovery” of a settlement deal is a transparently fictitious way to generate time and effort by the plaintiff’s lawyers that they then present to the court as a justification for the dollar fee payment the parties previously agreed would be paid to the lawyers. Trust me on this – I’ve negotiated many such settlements. Settlements that fail to go forward after “confirmatory discovery” are a non-existent species.
So, here we are in October 2015, following a series of cases touted as the death-knell for the “merger tax” “disclosure only” settlement, looking at precisely such a settlement proposal. District Judge Tanya Walton Pratt, relatively new to the bench, will conduct a hearing on February 16, 2016 to consider whether to approve the proposed settlement. See Scheduling Order in McGill v. Hake.
We can only hope that Judge Pratt follows the lead of her brethren on New York and Delaware and continues the process by which the lawyers’ cottage industry of “merger tax” litigation can be eliminated by judges simply doing their jobs.
October 27, 2105
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