Fight to lead WarnerMedia case shows not all shareholder M&A challenges are alike

The shareholder class action bar has more than its fair share of detractors and skeptics. Shareholder lawyers’ fee awards are public, so it’s no surprise that those fees have attracted scrutiny. And winning lead counsel appointments often means criticizing the competition, so shareholder firms themselves supply plenty of fodder for critics.

M&A challenges, in particular, have drawn scorn. Even as courts and defendants have stiffened resistance to so-called deal tax suits by plaintiffs’ firms demanding mootness fees to make the challenges go away, the cases are still enough of an issue that two noted securities law professors are waging a campaign to make deal tax suits economically nonviable for shareholder firms.

It’s all too easy to forget, in other words, that investors need shareholder firms to police corporate conduct, as U.S. regulators often acknowledge. That’s true even in M&A litigation challenging deals that allegedly shortchanged investors.

I was reminded of that principle when I read a terse order on Thursday from Vice Chancellor Travis Laster of Delaware Chancery Court. Laster was deciding between two teams of plaintiffs’ firms that sought to lead a case alleging conflicts of interest in Discovery Inc’s 2022 acquisition of WarnerMedia, a division of AT&T Inc.

The vice chancellor picked a slate of three shareholder firms – Bernstein Litowitz Berger & Grossmann, Labaton Sucharow, and Kessler Topaz Meltzer & Check — that submitted a proposed complaint focusing on the conduct of Discovery board members affiliated with media group Advance/Newhouse Partnership, a major Discovery investor.

The complaint alleges that Advance/Newhouse, which controlled nearly 25% of Discovery shareholders’ voting power, abused its contractual right to veto major deals in order to extract a $780 million side payment in exchange for approving the WarnerMedia merger. The complaint names only Advance and the Discovery board members affiliated with Advance as defendants.

The vice chancellor selected Bernstein Litowitz, Labaton and Kessler Topaz over the alternative slate, Robbins Geller Rudman & Dowd and Andrews & Springer. Those firms had filed a proposed complaint asserting much broader theories of liability – both direct claims for shareholders and derivative claims on behalf of Discovery — against a more expansive array of defendants, including Discovery board members that opposed the side payment to Advance.

Laster said the more targeted complaint was “superior” because it offered a “plausible account that is reasonably conceivable from a factual standpoint.” The more sweeping Robbins Geller complaint, he said, “lacks a unifying theory of the case.”

Fair enough. But no one who looks at the proposed complaints could credibly describe either of them as a money grab. Both filings reflect legitimate investigations — including extensive litigation to obtain Discovery’s books and records — and thoughtful analysis of shareholders’ potential claims. I’d argue, in fact, that the divergent theories in the two proposed complaints help prove the point: Neither set of shareholder firms filed a cut-and-paste pleading. Neither relied on cookie-cutter claims based on supposedly deficient proxy filings.

I should say here that there’s certainly no guarantee that Bernstein Litowitz, Labaton and Kessler Topaz will end up winning any recovery for shareholders. I contacted Discovery (now known as Warner Bros Discovery Inc), Advance and Warner Discovery defense lawyers from Weil, Gotshal & Manges. I did not hear back from any of them, but they will probably argue in a dismissal motion that Advance/Newhouse was not a controlling shareholder and that the Discovery board took proper steps to avert any purported conflict arising from Advance’s alleged veto power.

The lead counsel contest, I should also note, was not a love fest. The competing teams took the usual swipes at each other in their briefs urging Laster to pick them instead of the rival slate. Bernstein Litowitz and its allies argued that they’d thought harder about the best theory to pursue based on their extensive analysis of the corporate books and records Discovery turned over. They said their complaint was more credible because of their targeted approach, which, they argued, acknowledged documentary evidence that key Discovery board members vehemently opposed the side payment to Advance/Newhouse.

Robbins Geller and Andrews & Springer, meanwhile, argued that the other team had abandoned potentially valuable claims, including derivative claims.

Both sides told Laster that they’d done a more vigorous job of investigating. The truth, as Laster implied in Thursday’s order, is that both thoroughly vetted their allegations.

Lawyers from Bernstein Litowitz, Labaton and Kessler Topaz did not respond to my email, in which I asked not just about their successful bid to lead the case but also about my larger point that the competition between two thoughtful, deeply investigated complaints proves the error of tossing all M&A shareholder suits into a single trash can.

Randall Baron of Robbins Geller did respond on that point, arguing in an email statement that when Delaware Chancery judges cracked down on fee awards for shareholder lawyers who filed M&A challenges but obtained only beefed-up proxy disclosures, the court created more room for substantive, post-merger claims that board members failed shareholders.

“There’s a pretty straightforward equation here – if there’s a serious, thorough pre-suit investigation [of corporate book and records], you’re going to see much stronger cases,” Baron said. Robbins Geller and a “handful” of other firms, he said, are increasingly likely to spend time and money investigating prospective breach-of-duty claims arising from M&A deals.

“You’re now seeing complaints with more serious, detailed allegations, and weaker cases are being screened out long before a case is filed,” Baron added.

If you accept Baron’s premise – and, as I mentioned, I’m of the view that the competing prospective complaints in the Discovery cases are a good reason to do just that – then you might just have to agree with Baron about the implications. All constituencies – investors, board members and the Chancery Court itself – benefit when plaintiffs’ lawyers scrutinize M&A transactions to make sure shareholders were treated fairly. Reuters