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Does Anyone Win in Shareholder Lawsuits?
By: Patrick Kennedy - Attorney, Ice Miller LLP and Scott Snively - Attorney, Ice Miller LLP
Category: Business Law
If you have been following recent transactions involving the sale of a public company, chances are you have also read a fair amount about shareholder lawsuits challenging such transactions. After all, the rate at, and the speed of, which those lawsuits are brought has dramatically increased over the last few years.
IIB Twitter WatchOur most recent experience was a plaintiffs' law firm issuing a press release announcing an investigation into a merger within only a few hours of the transaction being announced, with a complaint filed a mere five days later.
Increase in Suits Filed
A recent study by Cornerstone Research, a legal research firm, identifies M&A class action lawsuits as one of the fastest growing types of securities litigation, and notes that 91 percent of deals valued at more than $100 million that were announced in 2010 and 2011 were subject to shareholder lawsuits. Similarly, the study notes that of the deals valued over $500 million, 95 percent of the deals announced in 2010, and 96 percent of the deals announced in 2011 were subject to shareholder litigation. This represents a significant increase when compared to similarly-sized deals that were announced in 2007, of which only 53 percent were challenged by shareholder lawsuits. The increase is even more remarkable when you consider the relative decrease in overall deal flow from 2007 to 2010.
Results of Suits Filed
A vast majority of shareholder lawsuits that are filed are ultimately settled prior to the closing of the transaction. In fact, Cornerstone's research suggests that almost 70 percent of deals valued over $100 million that were announced in 2010 and 2011 resulted in a settlement. However, most of these settlements did not result in any financial benefit to the shareholders bringing the suit. For example, Bloomberg has reported that 70 percent of such cases that were settled in the Delaware Chancery Court over the last two years have resulted in over $30 million in legal fees being awarded to plaintiffs’ attorneys, but no awards made to the plaintiffs in such cases.
Meanwhile, plaintiffs' lawyers contend that shareholders are still benefiting from filing suit, because settlement agreements often require that shareholders be provided with additional disclosures related to the transaction, and sometimes even result in the modification of certain deal terms. In addition, it is also noteworthy that most transactions challenged by shareholders are ultimately approved by the shareholders. However, it is also important to consider whether increased disclosures are worth the added transaction expenses, which if paid by the company, could ultimately be borne by the shareholders themselves.
Why Companies Settle
As most people that are active in the M&A market know, a transaction generally cannot move forward if there is pending material litigation, and there often is not enough time or money to fight every case to the end. Therefore, companies have an incentive to settle lawsuits and move on with the deal. As a result, it is becoming much easier for plaintiffs’ lawyers to receive a fee award simply by filing suit.
Why Companies Should Not Settle
For those companies that intend to take part in future acquisitions, the primary reason why most do not want to settle these cases is obvious; they do not want to be seen as someone that will quickly settle and move on. Otherwise they risk becoming an easy target for future litigation. Additionally, a settlement offers little or no benefit to officers and directors that have been accused of breaching fiduciary duties or acting in their own interest, and who are trying to clear their name.
Despite the disfavor with fee awards to plaintiffs' lawyers that has been voiced by some members of the Delaware Chancery Court, they continue to grant fee awards, and the number of deals that are subject to multiple shareholder lawsuits continues to rise. Until that changes, it appears that these lawsuits will not be going anywhere and should be an expected part of any public company merger or acquisition. However, as it was recently pointed out by a Vice Chancellor in a case that was brought before the Delaware Chancery Court (Stourbridge Investments LLC vs. Bersoff), it is hard to imagine that over 90 percent of M&A transactions are generated as the result of a breach of fiduciary duties.
If you have any questions or need additional information regarding shareholder lawsuits, please contact Patrick Kennedy at 614-462-1078 or patrick.kennedy@icemiller.com or Scott Snively at 317-236-2375 or scott.snively@icemiller.com or any member of the Ice Miller Business Group.
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.
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