Tools to Defend Against Securities Litigation Arising out of Cross-Border M&A Transactions
Litigation following a merger involving publicly traded companies has become so commonplace in recent years that shareholder lawsuits challenging proposed mergers and acquisitions are frequently (and begrudgingly) referred to as a “deal tax.” In 2014, such lawsuits were filed in 93 percent of deals valued over $100 million, compared to only 44 percent in 2007. Given these statistics, the current M&A litigation trend is widely regarded as little more than a broad effort to extort attorney’s fees by threatening to hold up deals. The response is typically motions practice, including a motion to dismiss for failure to state a claim, often followed by limited discovery and a settlement.
But if your client is a foreign corporation targeted by M&A litigation in a U.S. court, you may have additional tools at your disposal: the related doctrines of international comity and forum non conveniens. Under these doctrines, a shareholder lawsuit alleging improprieties in a merger or acquisition involving a foreign company may be subject to dismissal, in large part simply out of deference for the fact that foreign law governs the dispute. This update focuses on application of Canadian law, as it is one of the most common scenarios and provides for a strong argument. These principals can apply with equal force when a company is incorporated in other foreign countries, but a case-by-case assessment is required.
Companies organized under Canadian law must often undergo an M&A approval process overseen by Canadian courts, and U.S. courts have recognized that Canadian securities laws are as protective of shareholder rights as U.S. securities laws. These aspects of Canadian law create a strong opportunity to use the doctrines of international comity and forum non conveniens to dismiss shareholder lawsuits alleging that a Canadian company or its directors have violated U.S. securities laws in connection with a planned merger or acquisition. Moreover, while plaintiffs will frequently plead a breach of state law fiduciary duty claim, if the company is incorporated in a foreign jurisdiction, this claim should be inapplicable, as foreign law will supply the legal duties of the officers and directors of the company.
International Comity, Forum Non Conveniens, and the Canadian M&A Approval Process
International comity—or “courtesy”—is a long-established doctrine that requires U.S. courts to dismiss a lawsuit where the subject matter of the dispute is currently (or, in some cases, has previously been) the focus of a foreign court proceeding. This doctrine is based on the idea that U.S. courts should defer to the court of another nation that has already begun working to resolve the disputed issues, as long as the application of that nation’s laws would not undermine U.S. policy.
Similarly, the doctrine of forum non conveniens requires a lawsuit to be dismissed where: (1) public and private interests clearly point toward the dispute being litigated in a foreign court; (2) foreign law applies; and (3) the defendant would be amendable to process in that alternative forum. Among the public and private interests to be considered in this analysis are the foreign jurisdiction’s interest in having its controversies decided at home, the avoidance of applying foreign laws, and the convenience of litigating in a particular forum.
These legal doctrines are useful to defend against M&A litigation brought in the U.S. against a Canadian company because U.S. courts have observed that Canada’s M&A approval process implicates concerns of international comity and forum non conveniens. Under the Canada Business Corporation Act (“CBCA”), proposed mergers and acquisitions are often carried out through a judicial process requiring, among other things, that the subject corporation formally seek approval for its planned business arrangement, its notice to shareholders, and its shareholder meeting and vote. In connection with this approval process, the CBCA also provides several different causes of action for shareholders or interested parties to challenge the plan of arrangement, such as dissent rights and a remedy for shareholder oppression. The securities laws of the Canadian provinces generally contain nearly identical provisions. This ongoing process, and the rights available to shareholders in Canada, can provide a strong argument for terminating U.S. merger litigation.
Foreign companies targeted by M&A litigation in the U.S. should consider raising international comity and forum non conveniens to fend off these lawsuits. This is particularly true for Canadian companies, because a number of federal and state courts have expressed confidence in the integrity of Canada’s M&A approval process and shown a corresponding reluctance to interfere with it. While most of these decisions base this rationale on international comity, the same logic can also justify dismissal under forum non conveniens. The potential applicability of these doctrines can be particularly useful in the realm of M&A litigation, where success is often attained by gaining procedural advantages to end the litigation or at least drive down the cost of settlement. Advanced planning is helpful in this regard, as foreign legal experts must typically be secured to support these arguments in any motion to dismiss that is filed.