November 2012

I attended the Supreme Court argument in Amgen yesterday.  Law360 and the 10b-5 Daily, written by my former Wilson Sonsini partner Lyle Roberts (now at Cooley), have posted good summaries of the argument.

Here are links to (1) my October 15 blog post about Amgen and its significance and (2) the Amgen argument transcript.

After a reminder about the legal issue, I offer some thoughts about the argument, including Justice Scalia’s statement, “So maybe we should overrule Basic ….”

The Legal Issue

Reliance is an essential element of a Section 10(b) claim. Absent some way to harmonize individual issues of reliance, however, class treatment of a securities class action is not possible; individual issues would overwhelm common ones, precluding certification under Federal Rule of Civil Procedure 23(b)(3).

In Basic v. Levinson, the Supreme Court provided a solution: a rebuttable presumption of reliance based on the “fraud-on-the-market” theory, which provides that a security traded in an efficient market reflects all public material information. Purchasers (or sellers) rely on the integrity of the market price, and thus on a material misrepresentation.  Decisions following Basic have established three conditions to its application: market efficiency, a public misrepresentation, and a purchase (or sale) between the misrepresentation and the disclosure of the “truth.”

At issue in Amgen is whether the materiality of an alleged misrepresentation is also a condition to the presumption’s application for purposes of Rule 23(b)(3).

The Core of the Dispute

Most of the Amgen argument centered on the following debate:  Materiality is a substantive element of a Section 10(b) claim.  Amgen and the plaintiffs agree that materiality, as a substantive element, is a legal question common to the class.  The United States (and I suspect the plaintiffs too, if they had been asked) agreed that materiality is a condition to the application of the fraud-on-the-market doctrine for purposes of the merits, but not for purposes of Rule 23.

So the dispute boils down to this: if courts were to determine materiality at class certification, they would be deciding a “common question” (i.e. materiality as a substantive element), albeit for purposes of determining whether reliance is a common question; but if courts do not determine materiality at class certification, they are either prematurely or improperly certifying a class, because materiality is necessary to make reliance a common question.  Justice Scalia amplified the latter point as follows:

Materiality is a common issue.  Reliance is only a common issue if you accept the fraud-on-the-market theory.  That’s the problem.  And you are using the one, which is a common issue, to leapfrog into the second, to make the efficiency of the market reasoning something that it isn’t.

There was a lot of fairly technical discussion about the considerations bearing on these issues, including (a) the legal and practical effect of an immateriality ruling at class certification on a class member’s individual claim, (b) the difference between adjudication of materiality at class certification and summary judgment, and (c) the fact that market efficiency and a public statement – both undisputed conditions to the presumption’s application – also are common to all class members.

I’m not a Supreme Court observer and thus will leave the oral argument tea-leaf reading to others.    But it seems to me that, in resolving the technical legal question, the Court will be influenced by precedent proscribing the limits of securities class actions because of the “danger of vexatiousness” they present and the extraordinary pressure a certified class places on defendants to settle.  Justice Scalia emphasized the settlement-pressure point.  In response to a question from Justice Breyer, Seth Waxman of Wilmer Hale, on Amgen’s behalf, synthesized the technical legal point and policy point nicely:

the point of Rule 23 is to say, you get to use this very useful and powerful device if you have the key to the gate, and the key to the gate is showing that the answer to the question, will reliance be proven commonly – not lost commonly, but proven commonly – is in fact yes.


Continue Reading Supreme Court Argument in Amgen

On October 24, Kevin LaCroix’s D&O Diary discussed a report called “The Trial Lawyers’ New Merger Tax,” published by the U.S. Chamber Institute for Legal Reform.  The report proposes several legislative approaches that would funnel all shareholder lawsuits challenging mergers to the seller corporation’s state of incorporation.  Kevin has been a leading commentator in the discussion of the M&A-case problem.  I started to write a reply to his October 24 post but my reply became too involved for a simple comment.  So, I decided to turn it into a post here.

I doubt I need to convince many people, including a great many plaintiffs’ lawyers, that the explosion of M&A cases is a problem.  The problem, of course, is not that shareholders bring lawsuits challenging mergers.  Challenges to transactions based on problematic processes, such as the one at issue in Smith v. Van Gorkom, have improved corporate decision-making.  Rather, the problem is that virtually every acquisition of a public company draws a lawsuit, even though very few transactions are actually problematic, and most cases are filed very quickly, before plaintiffs’ lawyers could possibly have enough information to decide whether the case might have merit.

The result is spurious and wasteful litigation.  But very few cases present significant risk, so the vast majority of cases present a simple nuisance that can be resolved through painless additions to the proxy statement and a relatively small payment to the plaintiffs’ lawyers.  Although companies that are sued bemoan the macro M&A-case problem, each individual company understandably focuses on its own case, and the vast majority conclude that it’s best to settle it rather than defend it to the bitter end.  Collectively, however, the M&A-case problem is significant and needs to be addressed.

Everyone suffers from the M&A-case problem.  Public companies being acquired now expect to be sued, regardless how favorable the transaction and how pristine the process, and are paying higher D&O insurance premiums.  D&O insurers collectively have suffered the full brunt of the problem through payment of defense costs and settlements.  Plaintiffs’ securities lawyers who don’t bring M&A cases, or who bring them more thoughtfully than others, suffer from guilt by association.  Defense lawyers’ law practices have benefited from the increase in M&A cases, but I for one – and I’d bet that the vast majority of my peers would agree with me – would prefer to defend more legitimate M&A cases or other types of matters than the type of M&A cases I’m addressing.

I believe there are two sets of related root causes of the M&A-case problem:

  1. There are too many plaintiffs’ lawyers who bring M&A cases, and too many lawyers file cases over the same transaction with too little coordination among the cases.
  2. Too few cases are weeded out on a motion to dismiss, before the time to settle arrives.  This is due to a number of factors and dynamics, including pleading standards, expedited discovery, and the timing of the transaction.

These sets of causes are intertwined.  Companies are willing to settle because they want certainty that the deal will close on time.  They need to settle to ensure certainty, even if the case lacks merit, because too few cases are dismissed.  They are able to settle because they usually can do so quickly and cheaply.  This is so because few of the plaintiffs’ M&A firms are set up to vigorously litigate even a small percentage of the cases they file; instead, these law firms take a low-intensity, high-volume approach.  Such firms can survive in the M&A-case “market” because of the two root causes: (1) there is too little coordination of the cases – which means that firms often obtain some recovery just by filing a case – and (2) too few cases are weeded out at the dismissal stage – which means that companies must settle to obtain certainty that the deal will close on time.

All of the foregoing adds up to make the M&A litigation business an attractive one for certain plaintiffs’ lawyers.  That attraction increases the number of plaintiffs’ lawyers trolling for cases, which in turn leads to more filings.Continue Reading M&A Litigation: A Potential Partial Solution to a Big Problem