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M&A litigants getting mixed signals from Delaware court

The law of haste makes waste should govern M&A litigation. Delaware judges often warn attorneys to do their homework before suing. Now one group of legal eagles is being grounded for trying to do just that. The mixed message is undermining efforts to curb dubious suits over deals.

Almost every major transaction seems to be a target. State cases soared from fewer than 50 in 1996 to more than 260 in 2010, a Lewis & Clark Law School study shows. Federal cases hit 43 last year after jumping sixfold in 2010, according to NERA Economic Consulting.

That has prompted judges in Delaware, the hot spot for deal litigation, to try to weed out weak suits. One approach requires that lawyers gather evidence by examining a company's corporate books and records before filing so-called derivative cases. On Tuesday Delaware Chancellor Leo Strine tossed out a suit challenging Bank of America's mortgage practices because the plaintiffs had failed to request the bank's records. Echoing several of his colleagues, he called such a request "critical" in "most circumstances."

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Some attorneys may wonder whether he meant it. After Freeport-McMoRan announced a $9-billion (U.S.) deal for McMoRan Exploration and Plains Exploration on Dec. 5, shareholders of each company filed dozens of suits. But two law firms – Grant & Eisenhofer and Bernstein Litowitz – first demanded to see Freeport's records. While they waited, a judge granted other firms the lucrative right to lead the litigation, because they had filed their lawsuits first – without bothering to request corporate documents.

The Bernstein Litowitz and Grant & Eisenhofer lawyers were understandably upset and on Monday asked the judge for permission to challenge his decision in the Delaware Supreme Court. He has yet to make a decision.

In justifying his call, the judge said no books-and-records demand was necessary because the cases didn't technically claim the Freeport board had breached its duty to oversee the company. Besides, he noted, the deal was due to close in about two months and time was running short.

Whether those explanations hold water should be up to the Delaware Supreme Court to decide. Judges are right to punish a rush to the courthouse. But they need to be consistent.

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