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Delaware ruling signals tougher line on “merger tax” class actions

WILMINGTON, Del (Reuters) – A Delaware judge signaled on Thursday that the rules are changing for shareholder class actions challenging corporate mergers, which are widely criticized for reaping millions dollars in lawyers’ fees while rarely generating a penny for investors.

The ruling approved a settlement of a class action that challenged the $3.6 billion sale of Riverbed Technologies to private equity firm Thoma Bravo. But in doing so, it put lawyers on notice the main court for U.S. shareholder disputes will be toughening the standards for the lawsuits, which critics have labeled a “merger tax.”

The five judges on Delaware’s Court of Chancery have been pressured by business groups to rein in the class actions, which are rushed to court and challenge more than 90 percent of all merger deals.

The cases settle in just a few months with shareholders usually only getting more information about the deal. The company’s directors get protection from future lawsuits and the lawyers who filed the cases usually hope to collect $400,000 or more in fees.

A Reuters investigation earlier this year profiled one of the most prolific plaintiffs behind the cases.

Vice Chancellor Sam Glasscock wrote he would have rejected the Riverbed settlement “if it were not for the reasonable reliance of the parties on formerly settled practice in this court.”

The ability to rely on past practices “will be diminished or eliminated going forward in light of this memorandum opinion and other decisions of this court,” Glasscock wrote.

Glasscock indicated directors might expect class action settlements in the future will provide fewer protections for them, calling the legal releases in the Riverbed deal “troubling.”

He awarded the shareholder attorneys a $300,000 fee, less than the $500,000 they requested, noting he had to consider how his decision will incentivize future litigation.

“I think the opinion captures a broader shift that’s been bubbling up in hearings,” said Minor Myers, a professor at Brooklyn Law School. “This opinion seems like it’s designed to serve as a channel marker for future settlements.”

The judges have spent recent years attacking the plaintiffs’ side of lawsuits by trimming fees for shareholder attorneys, encouraging more investigation before filing cases and guiding boards to adopt corporate bylaws aimed at curtailing the cases.

In recent months, Delaware judges have turned their attention to cutting the benefits the defendants get from the litigation, even as business leaders criticize the cases.

The judges have questioned the legal releases, or protection from future lawsuits, that are part of settlements. The influential chief justice of Delaware’s Supreme Court, Leo Strine, coined the term “intergalatic releases” because they can protect directors for all potential legal claims, even ones unknown at the time of the settlement.

Larry Hamermesh, a professor at Widener University School of Law in Wilmington Delaware, said the intergalatic releases allow deals to close quickly and provide a way to cheaply get rid of the class action. He said corporate lawyers will not like Glasscock’s ruling.

“Will defendants hate this, you ask?” said Hamermesh, “The answer is clearly yes.” (Reporting by Tom Hals in Wilmington, Delaware; Editing by Alan Crosby)

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