Litigation: 4 steps to help prevent M&A shareholder litigation

Minimize the risk of facing a lawsuit, and reduce the cost of litigation that does come up

The risk that a public company will face shareholder litigation stemming from an announced merger or acquisition is on the rise. According to Cornerstone Research, 91percent of deals valued at $100 million or greater from 2010 to 2011 resulted in lawsuits challenging those deals. The number of lawsuits challenging each deal also has grown from an average of 2.8 lawsuits per deal in 2007, to 6.2 lawsuits per deal in 2011, with lawsuits often filed in multiple jurisdictions.

This proliferation of litigation is costly and distracting to a company focused on consummating a deal. Whether or not your company currently is contemplating a merger or acquisition, there are several steps in-house counsel should consider to help minimize the risk and cost of future litigation.

For example, the Delaware Court of Chancery temporarily enjoined a merger transaction involving Del Monte Foods and certain private equity firms because of conflicts of interest that existed with the investment bank advising on the deal. The investment bank had previously advised Del Monte in connection with various financing transactions. In addition, when Del Monte was not for sale, the investment bank sought unsolicited acquisition interest among various private equity firms that ultimately resulted in bids being presented. The investment bank, however, failed to disclose to Del Monte that it planned to attempt to provide buy-side financing to any successful bidder.

In deciding to enjoin the transaction, the court found, among other things, that the role played by the investment bank impacted the bids considered and the value of the deal. As a result, the court criticized the board’s conduct even though it found the board was misled. The litigation ultimately settled with a payment to shareholders of $89.4 million, $23.7 million of which was paid by the investment bank.

However, prior cases and settlements can serve as a guide to the types and scope of disclosures that companies should consider, including, but not limited to:

  • Existing management projections of free cash flow
  • Non-standard financial analysis
  • Fee arrangements
  • The assumptions underlying the valuation analyses, including the basis for comparables, excluded comparables, data for specific comparables and the assumptions underlying discounted cash flow premiums
  • Summaries of revised or updated presentations made to the Board regarding valuations or other analyses
  • Large shareholder demands for premiums on holdings above and beyond that delivered to other shareholders, whether or not those demands were rejected
  • Discussions regarding post-merger employment agreements for management prior to the signing of the merger agreement

Counsel should analyze previously litigated disclosures and consider modeling disclosures based on the enhanced disclosures approved by the court in prior cases. While no court has yet ruled that modeling disclosures on previously accepted enhanced disclosures made by other companies is dispositive, an argument could be made that court approval of disclosure only settlements is a finding of the adequacy of the disclosures, because, in theory, a court could not approve a disclosure-only settlement that includes inadequate disclosures. In any event, using previously enhanced disclosures as models for your next deal, will make it harder for plaintiffs to plead that material information was not disclosed.

Contributing Author

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Jeffery Dailey

Jeffery A. Dailey is a partner at Akin Gump Strauss Hauer & Feld LLP in Philadelphia. He regularly represents companies, officers, directors and outside professionals in...

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