Most merger, acquisition deals subject to shareholder suits: Survey

By Judy Greenwald, Crain News Service

BOSTON (March 19, 2014) — Nearly 95 percent of U.S. mergers and acquisitions announced in 2013 valued at more than $100 million were challenged in shareholder lawsuits, according to a new survey.

This continues a trend that began in 2010 of shareholders' challenging at least 90 percent of M&A deals, according to Boston-based Cornerstone Research Inc.'s survey. There were 612 M&A lawsuits filed last year, according to the survey released March 14.

The report said M&A lawsuits usually take the form of a class action, with plaintiff attorneys typically alleging the target's board of directors violated its fiduciary duties by conducting a flawed sales process that failed to maximize shareholder value.

Common charges include the failure to conduct a sufficiently competitive sale; the existence of restrictive deal protections that discouraged additional bids; conflicts of interest, such as executive retention; and the target board's failure to disclose enough information about the sale and the financial adviser's valuation.

(In the tire industry, for example, in early January two law firms filed a securities class-action lawsuit against Cooper Tire & Rubber Co. on behalf of stockholders over the failed merger deal with India's Apollo Tyres Ltd. A month later a third suit was filed over the defunct deal. That action, filed Feb. 4 in the U.S. District Court for the District of Delaware, specifically alleged Cooper executives concealed the opposition of Chengshan Group, Cooper's joint venture partner in China, to the merger with Apollo.)

Other trends

• As in prior years, multiple lawsuits were filed for most deals, with an average of five lawsuits for deals valued at more than $100 million, and 6.2 average lawsuits filed for deals valued at more than $1 billion.

• The “race to file” apparently has subsided, with the first lawsuit filed an average of 11.7 days after the deal announcement in 2013, compared with 9.3 days in 2012 and 6.5 days in 2009.

• A total of 62 percent of the deals were litigated in more than one court, with the biggest percentage — 54 percent — filed in two courts. A total of 38 percent were filed in just one court, and 8 percent were filed in three or more courts, a percentage that has declined by half over the last two years, the survey said.

• The most active courts for M&A litigation, after the Delaware Court of Chancery, were Manhattan at 39, Santa Clara County, Calif., at 30 and Harris County, Texas, at 27.

• The trend of most litigation being resolved before the deal closed continued, with 75 percent of 2013 deals being resolved at by that point. Of these, 88 percent were settled, 9 percent withdrawn by plaintiffs and 3 percent dismissed by courts, said the survey.

Lawsuits that were not settled before the final closing remained pending for as long as four years, according to the study.

Observers have noted that merger objection cases are generally settled relatively quickly because of pressure to complete these deals.

Copies of the study, “Shareholder Litigation Involving Mergers and Acquisitions,” are available by clicking here.

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This report appeared on businessinsurance.com, the website of Business Insurance magazine, a Chicago-based sister publication of Tire Business.