Litigation dogs recent M&A activity

I’ve just returned from vacation and in the midst of catching up on recent merger activity, I’m finding that nearly every deal now comes packaged with at least one class action lawsuit. Is it me or does there seem to be a sudden rash of lawsuits in the M&A space?

In an attempt to answer this, I compiled the table shown at the end of the article. It shows that out of the 46 acquisitions proposed since June (that I was able to count–there may be more), 32 of them involve at least one class action lawsuit. That’s a whopping 70% of all deals! So, what gives?

Why all the lawsuits?
If you read the press accompanying the lawsuits, you’ll see that the overwhelming majority of them are founded on “fiduciary breach of duty” on the part of the board of directors of the company being acquired. The most popular “breaches of duty” include setting an unreasonably low price for the company as compared with recent stock highs (reached within the past couple of years) or structuring the deal so that no other company will want to make a competitive offer.

On the surface, it would seem as if these lawsuits have the best interest of the shareholders at heart, but don’t you find it just a bit suspicious that there are so many of these deals being pursued right now? Stranger things have happened, of course, but that doesn’t mean that everything is kosher in Denmark. (I can’t find the right metaphor but I think you know what I mean.)

What’s in it for the litigators?
Far be it from me to imply that lawyers are anything but honest and selfless, but I can’t help but think that this rash of cookie-cutter lawsuits is taking advantage of some newly-found grey area of securities law. It’s difficult to tell what the suing law firm has to gain because the results of recent lawsuits are either still pending or haven’t been published. The one case that was made public involved Laboratory Corp. of America’s (LH) take-over bid for Monogram Biosciences (MGRM). Two suits, one filed by Levi-Korsinsky (the “ambulance chaser” of this group), and the other by the law office of Howard G. Smith, were both settled out of court for undisclosed sums.

One might conjecture that these lawsuits are cheap to file and that any type of settlement might mean a quick and easy payday for the prosecuting attorneys. One big factor in their favor is the “pest” element. They know that shareholder approval is needed before any merger can commence and that it might behoove the attending companies to remove a potential thorn of shareholder discomfort before the terms of the merger are placed before them for their all-important vote.

So, what’s a shareholder to do if your company that is about to be acquired is hit with one of these lawsuits?

So far, the results have remained unchanged
If you’re in this position or are thinking of buying into the acquiring company, don’t fret. The three mergers that have so far been consummated (including that of Monogram Bio mentioned above) have gone through as originally planned. (The other two are Axsys Technologies (AXYS) and Cavalier Homes (CAV).) It seems as if the bark of these merger-chasing litigators is much more ferocious than their bite.

Preventative action
It might behoove the board of directors of target-acquisition companies to address the topic of “fiduciary responsibility” before a merger deal is struck. This will serve the dual purpose of reassuring their shareholders that the deal is in their best interests thereby avoiding grounds for potential lawsuits.

Obviously, there’s more to this subject than meets the eye. I wish I had the time to do the in-depth investigative research needed to answer some of the questions posed, but I don’t. For further information on the major litigators in the M&A space, I refer you to their websites:

Litigator Links:
1. Levi-Korinsky:
2. Brodsky & Smith:
3. Kendall Law:
4. Howard G. Smith:
5. Wolf Haldenstein:

M&A Litigation 10-02-09

*Companies that are in involved in merger deals since June, 2009 with no pending litigation:

One Response to “Litigation dogs recent M&A activity”

  1. I wrote a blog post about this topic about a year ago and gave some examples of mergers where shareholders received an additional payout from class actions:
    For example, Foodarama shareholders obtained $14/share through a class action in addition to the $53/share merger consideration.
    I have also seen a case where the board woke up after a class action was filed and found another buyer who paid 5% more.
    There are many more instances where the benefits are less tangible financially in that the companies agree to make additional disclosures. These are cases where they were a sloppy or had outright errors in the proxy. In other instances they were trying to hide information from shareholders that they deemed embarrassing.

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