As businesses rebound from the international economic slump, mergers and acquisitions have multiplied. More than 21,000 deals totaling $1.9 trillion in volume were announced globally between January 2010 and November 2010, marking a 12 percent volume increase from 2009 igures, according to Bloomberg's 2011 M&A Outlook. Market experts predict continued increases in M&A activity this year, particularly in the energy industry.
The uptick in transactions is rife with opportunity for some savvy plaintiffs firms that have latched onto a lucrative litigation tactic: suing companies for deals that are allegedly unfair to shareholders, either in disclosure or pricing. The lawsuits, sometimes filed within hours of a deal's announcement, are profitable for plaintiffs firms because companies often settle in order to move forward with their transactions.
"Companies will settle rather than have the expense of a long, protracted fight," says David Grinberg, a partner at Manatt, Phelps & Phillips. "No deal is closing while there's litigation outstanding."
Securities Class Action Services reports that 216 deal-related lawsuits were filed between January 2010 and October 2010, compared to 191 such suits in 2009 and just 36 in 2008.
"More entrepreneurial plaintiffs lawyers are discovering how relatively easy it is to get a significant payday for doing little more than filing a complaint," says DLA Piper Partner Robert Brownlie.
Although M&A deal lawsuits aren't a new phenomenon, they have increased because the large federal securities class actions (think Enron) traditionally tackled by the plaintiffs bar have decreased since the recent recession, meaning firms have had to shift their focus in order to stay afloat.
"I'm trying to think of an M&A transaction that I've been involved in over the past two or three years where there hasn't been a suit, and I'm not sure I can name one," says Bingham McCutchen Partner Stephen Alexander, adding that settling the lawsuits has "become a cost of doing business."
Experts agree that companies embarking on deals can expect their stockholders to sue. And although settlements are a popular resolution for the sake of business, general counsel should be aware of some potential drawbacks to that decision.
Settling to Save
Companies tend to favor settlements in M&A deal lawsuits--even ones with weak claims--because they remove a potential obstacle from a transaction's successful completion and eliminate the financial risks inherent in litigation.
"There are good reasons to take advantage of settlement opportunities that limit risk for the client, limit risk for the deal and allow businesses to go forward," says Skadden Partner Edward Welch.
Most settlements in cases involving deals greater than $100 million are clustered in the $300,000 to $500,000 range, an increase from just a decade ago.
"There was a time when $25,000 to $50,000 would be enough to satisfy a plaintiffs lawyer in a disclosure settlement," says Brownlie, adding that firms are pushing the envelope with settlement amounts to test companies' willingness to get rid of a case. "They've figured out that a drop in the bucket for a public company is a deluge for an individual lawyer."
Despite the time- and cost-saving benefits of settlements, inside counsel should alert corporate board members that there are downsides in choosing to settle. For example, future deals could be compromised.
"If you have the reputation of somebody who will write a significant check to a plaintiffs law firm just to make a case go away, you've given even a greater economic incentive to plaintiffs lawyers to look for you and sue you," Brownlie says.
Some corporate leaders have had their personal reputations besmirched, even when they exercise due diligence in providing adequate disclosure to stockholders.
"For their efforts, [board members] are rewarded with being named personally in a lawsuit accusing them of horrendous breach of fiduciary duty or acting in their self interest," says Brownlie, whose clients have reported harmed relationships due to bad press surrounding a lawsuit. "You don't get the opportunity to vindicate yourself when you settle the case."
Most deal-related lawsuits are filed in the Delaware Court of Chancery because about 60 percent of Fortune 500 companies are incorporated in Delaware. The newest judge on the court, Vice Chancellor J. Travis Laster, who was appointed in 2009, has been vociferously critical of the nature of some shareholder suits, saying they feature warrantless claims and mainly benefit plaintiffs firms (see "Character Counts").
But Laster's criticism isn't limited to the plaintiffs bar, as is evident in Scully v. Nighthawk, a December 2010 case involving a merger between two radiology companies. In the case, Laster found that some of the shareholder claims merited investigation. However, the two sides quickly settled in an Arizona state court instead of allowing the case to proceed to trial in Delaware. Seemingly perturbed by the incident, Laster lambasted the defense for what he believed was an attempt to negotiate a collusive settlement.
"What happened here is the plaintiffs filed a case that really had legs," Laster said in a status conference regarding Scully. He contended that the "situation has all the hallmarks of collusive activity" between the plaintiffs lawyers and defense lawyers, who both clearly benefited from the case being shifted to Arizona where it was easily settled. Laster appointed special counsel to investigate the circumstances, ordered each set of counsel to provide him with reports on their involvement in the forum-selection process, and also hinted that he wouldn't hesitate to bar the defense counsel from the court.
Interestingly, the defense lawyer who was the target of Laster's reproach was one with whom he had a longstanding relationship. "I've litigated with him. I've litigated against him. I've eaten dinner with him. ... Everyone, even people I like on a personal level, has to follow the rules," said Laster.
Laster's comments on this case represent his strong adherence to the duties of the Delaware Court of Chancery, which "takes its obligation very seriously when it comes to reviewing a class action settlement arising out of a deal," says Skadden Partner Edward Micheletti. But at the same time, the Vice Chancellor's strong opinions have "caused plaintiffs lawyers, and defense lawyers who are in a settlement mode, to be wary about settling a case in Delaware," according to Brownlie.
Some plaintiffs firms have begun filing M&A deal lawsuits not only where a company is incorporated, often Delaware, but also in the state in which it is headquartered. The resulting multi-jurisdiction litigation on a single deal could amplify the risk of an adverse decision on corporate defendants because a shareholder suit heard in a state court could result in a jury trial or punitive damages.
Some companies are responding to the threat of multivenue litigation by incorporating provisions into their charters or bylaws that require shareholder claims to be filed only in the Delaware Court of Chancery, where judges routinely hear deal-related cases. But experts warn that creating such provisions is a lengthy process that requires board determination and stockholder approval.
"It's a relatively new concept that hasn't really been fully tested yet," Micheletti says. Although Laster indicated in his March 2010 decision in in re Revlon, Inc. Shareholders Litigation that fixed-forum provisions for intra-corporate disputes may be valid in terms of efficiency, a California court in the January cases of Galaviz v. Berg and Prince v. Berg said a board-approved venue provision wasn't enforceable because it hadn't been approved by shareholders.
At the same time, stockholder disputes brought before a state court could potentially be advantageous to corporate defendants wanting to settle. Unlike the Delaware Court of Chancery, state courts do not regularly hear deal-related cases and may be more inclined to approve settlements, Brownlie says.
Keeping in mind the potential risks of multiforum litigation, general counsel of companies involved in deals should take extra care ensuring their processes are sound.
"Make sure there's no room for someone to claim that the disclosure is nothing less than wholesome," says Grinberg. "You can't shortcut the process, either in terms of performing it or documenting it. At the end of the day, that's what's going to go in front of the court."