Vanderbilt Law Review

First Page



Companies and their investors have been battling over the value of representative shareholder litigation since at least the 1940s. Investors argue that managerial agency costs are high and that class actions and derivative suits are key shareholder monitoring mechanisms that they can deploy to keep managers in line. Companies, on the other hand, believe that the plaintiffs' bar drives representative litigation claims, as agency costs in contingency fee suits make the lawyer the real party in interest. Over the past several decades, there have been numerous skirmishes between these two sets of actors, manifesting themselves, for example, in congressional debates over the Private Securities Litigation Reform Act ("PSLRA") in 1995. Yet, even though one side or the other may temporarily gain the upper hand, the war continues today unabated.

The latest battleground of this extended fight is multijurisdictional deal litigation. Many merger-and-acquisition ("M&A") transactions attract shareholder litigation challenging the fairness of the economic terms of the deal for the target shareholders. Since the end of the financial crisis, however, the number of jurisdictions in which shareholders attack each individual transaction has increased. The potential for multijurisdictional litigation over a single deal arises because of the existing rules of civil procedure. Shareholders that wish to challenge the proposed terms of an M&A transaction can sue in either a state or federal court located in either the target company's state of incorporation or the location of the company's headquarters (assuming the defendants have the necessary presence in the jurisdiction). While the internal affairs doctrine dictates that the governing law for such a suit is that of the state of incorporation, courts outside of that state have long entertained M&A suits where the filing shareholder has appropriately established jurisdiction by simply applying the incorporating state's law. Thus, if two different investors choose to file complaints in two different state courts, perhaps one in Delaware (a frequent state of incorporation) and another in New York (a frequent headquarters state), then, while both the Delaware and the New York courts may have jurisdiction to hear the case, only Delaware law would apply to determine the validity of the investors' concerns.