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Merger objection lawsuits are on the rise.
Sarah Johnson, CFO.com | US
February 16, 2011
You've found and courted a promising company to add to your corporate portfolio. You've done the homework on its financials and value. And you've made a splashy announcement about the deal and the many benefits it will bring to your business.
Possibly waiting to spoil the celebration is an expedited shareholder lawsuit calling for a stop to the merger or acquisition. Such "merger objection" filings are on the rise, from just 70 in 2005 to 335 in 2010, according to Advisen, a risk-data analysis firm.
As these numbers suggest, the risk of such a lawsuit is small: only 4% of the 7,789 M&A announcements in the United States last year were followed by a merger objection suit. Still, the lawsuits can be a nuisance. Usually filed against the seller, they often allege that a company's directors and officers breached their fiduciary duty in approving a deal and demand injunctive relief.
Although the lawsuits may appear to jeopardize companies' hard work in reaching terms with a target (and put CFOs' personal liability on the line), what often results is a quick settlement, according to David Bradford, editor-in-chief at Advisen. This tendency to settle, right before shareholder meetings convened to seal the deals, has perhaps encouraged these lawsuits to proliferate. Moreover, Advisen suggests, plaintiffs' attorneys see these suits as a source of income; they collect about $500,000 per case on average, the research firm says.
Indeed, many of these suits stem from the same law firms, a fact noted last year in a critical opinion by Vice Chancellor J. Travis Laster of the Delaware Chancery Court in a case involving Revlon. He called some of the plaintiffs' attorneys "frequent filers" who don't show much motivation in seriously pursuing their suits. Laster further noted the speed with which these cases are filed.
On February 1, for example, Time Warner Cable announced it would acquire NaviSite. The next day, a shareholder group said a law firm was investigating the responsibilities of NaviSite's officers and directors in connection with the deal. Within a week, an investor filed suit to block the merger.
The quick pace of these cases continues on the back end. Some are settled in as little as three weeks, says Robert Brownlie, a partner at law firm DLA Piper who represents companies in shareholder lawsuits. He estimates that "maybe less than 10%" of these types of cases are fought in court.
Even though these cases rarely derail a deal, they do take up resources at a time when a company may need its executives — particularly those in the finance department — to focus on the major project at hand. The cases can cause unwarranted "anxiety in the people who worked hard to get the deal done," says Brownlie. "These are generally if not universally good deals for stakeholders — otherwise, they wouldn't have gotten that far."