It has been well-reported that the sale of a public company—no matter what the price—is almost always accompanied by shareholder suits against the selling company’s directors and officers. To be sure, there are situations in which shareholders are more than justified in bringing suit to stop or fix a transaction. This is particularly the case with deals that involve undisclosed conflicts of interest. However, it just cannot be the case that approaching 100% of public company M&A deals (where the target is worth more than $100 million) are problematic. (The rate of M&A suits for smaller public M&A deals is closer to 60%—and the idea that more than half of M&A deals of this size are improper or inadequately described to shareholders is unreasonable.)
The allegations in the suits brought to stop M&A deals normally include things like breaches of fiduciary duty and inadequate disclosures. The latter is especially pernicious: nothing is easier than for plaintiffs’ attorneys to allege that the disclosure provided—no matter what the length or level of detail—was inadequate.
The vast majority of M&A suits are settled for little more than plaintiffs’ attorneys’ fees, with the plaintiffs’ taking credit for additional disclosures made as a result of their efforts. The typical range of plaintiffs’ attorneys’ fees for these types of cases has lately been in the neighborhood of $400,000 to $1.2 million, give or take. It’s a nice payday for what can seem like not a lot of work by the plaintiffs’ attorneys over a relatively short period of time. In this regard it’s worth noting that, according to the most recent Cornerstone report on the topic, 81% of settlements in 2012 were disclosure-only settlements.
But are plaintiffs’ attorneys’ fee awards inevitable? Of course board members could refuse to settle. This is a difficult stand to take when the cost of settling is relatively small compared to the overall economics of a transaction. Also, refusing to settle definitely impairs deal certainty. It is a difficult day when a board of directors has to contemplate the idea of letting a good deal for shareholders slip away because the board is appalled by the idea of settling with the plaintiffs’ attorneys. This feels especially bad once a board has decided that the way to maximize shareholder return is by closing the deal.
Many have said that the situation won’t be fixed—and plaintiffs’ attorneys will only be further emboldened to bring frivolous claims—until the courts become more skeptical of plaintiffs’ attorney claims. The argument is that fewer frivolous cases will be brought when bringing frivolous cases is no longer a lucrative pursuit for plaintiffs’ attorneys. This argument seems reasonable: after all, the plaintiffs’ bar only takes cases when they believe that they will be paid enough to make the fronting of the resources needed to bring suit worth their while. It’s simple economics.
Perhaps the courts are taking note of this argument (or, more likely, can’t help but notice on their own how absurd the situation has become). It’s certainly encouraging to see that, per Cornerstone, average plaintiffs’ attorneys’ fee awards for disclosure-only settlements declined in 2012 to $540,000. Even better, this is the third consecutive year of decline.
Still more heartening is a recent Forbes article on the topic. This article highlighted two recent M&A disclosure cases in which plaintiffs’ attorneys were denied fees altogether: Frontier Oil/Holly Corp and Transatlantic Holdings/Alleghany. In Frontier Oil, a Texas appeals court would have nothing to do with the original $612,500 plaintiffs’ attorneys’ fee award. In Transatlantic Holdings, it was Delaware Chancellor Leo Strine who threw out an award of about $500,000. This outcome is all the more notable given that Chancellor Strine has a track record of awarding significant plaintiffs’ attorneys’ fees where he feels they are warranted. For example, Chancellor Strine awarded a plaintiffs’ attorneys’ fee of $285 million in what was a very serious M&A case, the Grupo Mexico suit.
Although it’s still early days, the clear implication is that spending resources on thoughtful disclosure during an M&A process may be a relatively cheap—and very satisfying—litigation risk mitigation strategy for boards and the companies they serve.
The views expressed in this blog are solely those of the author. This blog should not be taken as insurance or legal advice for your particular situation. Questions? Comments? Concerns? Email me at firstname.lastname@example.org.