Is the frivolous M&A litigation party winding down?
When a public company announces that it is being acquired, no one is surprised anymore when suits are filed against that company's directors. Whether the price is good or great doesn't seem to matter.
March 24, 2014 at 08:00 PM
6 minute read
When a public company announces that it is being acquired, no one is surprised anymore when suits are filed against that company's directors. Whether the price is good or great doesn't seem to matter. In 2013, 97.5 percent of public M&A deals worth more than $100 million were sued an average of seven times each.
To be sure, there are instances of what may have been true M&A misbehavior that harmed shareholders. Certainly that was the conclusion when the Delaware Court of Chancery awarded a $1.2 billion judgment (and $300 million plaintiffs' attorney fee award) in the class action lawsuit over Grupo México, S.A.B. de C.V's acquisition of Southern Peru Copper.
However, it is unlikely that almost 100 percent of M&A deals involve breaches of fiduciary duties. Directors could fight the non-meritorious claims. Unfortunately, it often doesn't make sense for directors to fight when they can instead settle a case by paying an immaterial amount compared to the size of the M&A deal at stake. Of course, this dynamic merely emboldens plaintiffs to bring more cases, and—presumably—attempt to hold out for ever higher settlement amounts.
But there may be some good news on the horizon when it comes to the elimination of frivolous M&A suits. Consider the outcome of the recently decided Answers Corporation M&A litigation. Answers sold to a private equity buyer for a 30-plus percent premium over the company's trading price. As has become the norm, and notwithstanding the deal premium, the plaintiffs sued the Answers board and attempted to stop the deal. The plaintiffs alleged that the four independent directors on the Answers board had been influenced by the other three directors to act disloyally or in bad faith.
To the deal participant's credit, they did not settle. Rather, they endured the expense (and irritation) of both expedited and extended post-closing discovery. After all of this discovery, the plaintiffs found nothing to support their allegations. The result was a summary judgment decision in favor of the defendants.
So, have we reached the bottom when it comes to frivolous M&A litigation? Perhaps. The Answers result comes on the heels of at least two other recent cases in which the Delaware Chancery Court was unimpressed with plaintiffs' efforts and, consequently, unwilling to let the plaintiffs continue their litigation.
Notwithstanding the Answers decision, M&A litigation will not evaporate all at once or even quickly. A prudent board that may be considering the sale of a company needs to consider—and document its consideration of—its fiduciary duties early and often. The board must ensure that the sale process it runs is reasonably designed to maximize shareholder return. Assessing potential conflicts is a critical step. In many cases, it is a good idea to form a special independent committee of the board to run the M&A process. Finally, consider the importance of bringing in an M&A litigator to advise the board on its process as soon as possible. M&A litigation for any deal is still highly probable. Given the statistics, planning for this type of litigation is only prudent.
When a public company announces that it is being acquired, no one is surprised anymore when suits are filed against that company's directors. Whether the price is good or great doesn't seem to matter. In 2013, 97.5 percent of public M&A deals worth more than $100 million were sued an average of seven times each.
To be sure, there are instances of what may have been true M&A misbehavior that harmed shareholders. Certainly that was the conclusion when the Delaware Court of Chancery awarded a $1.2 billion judgment (and $300 million plaintiffs' attorney fee award) in the class action lawsuit over Grupo México, S.A.B. de C.V's acquisition of Southern Peru Copper.
However, it is unlikely that almost 100 percent of M&A deals involve breaches of fiduciary duties. Directors could fight the non-meritorious claims. Unfortunately, it often doesn't make sense for directors to fight when they can instead settle a case by paying an immaterial amount compared to the size of the M&A deal at stake. Of course, this dynamic merely emboldens plaintiffs to bring more cases, and—presumably—attempt to hold out for ever higher settlement amounts.
But there may be some good news on the horizon when it comes to the elimination of frivolous M&A suits. Consider the outcome of the recently decided Answers Corporation M&A litigation. Answers sold to a private equity buyer for a 30-plus percent premium over the company's trading price. As has become the norm, and notwithstanding the deal premium, the plaintiffs sued the Answers board and attempted to stop the deal. The plaintiffs alleged that the four independent directors on the Answers board had been influenced by the other three directors to act disloyally or in bad faith.
To the deal participant's credit, they did not settle. Rather, they endured the expense (and irritation) of both expedited and extended post-closing discovery. After all of this discovery, the plaintiffs found nothing to support their allegations. The result was a summary judgment decision in favor of the defendants.
So, have we reached the bottom when it comes to frivolous M&A litigation? Perhaps. The Answers result comes on the heels of at least two other recent cases in which the Delaware Chancery Court was unimpressed with plaintiffs' efforts and, consequently, unwilling to let the plaintiffs continue their litigation.
Notwithstanding the Answers decision, M&A litigation will not evaporate all at once or even quickly. A prudent board that may be considering the sale of a company needs to consider—and document its consideration of—its fiduciary duties early and often. The board must ensure that the sale process it runs is reasonably designed to maximize shareholder return. Assessing potential conflicts is a critical step. In many cases, it is a good idea to form a special independent committee of the board to run the M&A process. Finally, consider the importance of bringing in an M&A litigator to advise the board on its process as soon as possible. M&A litigation for any deal is still highly probable. Given the statistics, planning for this type of litigation is only prudent.
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