Thursday, February 26, 2015

Doing a (Large) Deal? Expect to Get Sued

A year ago we posted  "Doing a (Large) Deal? Expect to Get Sued" which discussed research by Matthew D. Cain  and Steven M. Davidoff.  They've updated their sample to include 2013 and we've updated the original post accordingly.   The numbers are even more striking today.  The updated, original post is below. 

 A recent working paper by Matthew D. Cain  and Steven M. Davidoff entitled Takeover Litigation in 2013 provides some interesting statistics about the rise in merger related litigation.  Their Table A, reproduced below reveals a dramatic increase in litigation over the past eight years.  In particular, about 39% of deals involved litigation in 2005, while close to 97% involved litigation in 2013.

Litigation rates over time
Year Deals Litigation % with Litigation
2005 183 72 39.30%
2006 232 99 42.70%
2007 249 97 39.00%
2008 104 50 48.10%
2009 73 62 84.90%
2010 150 131 87.30%
2011 128 117 91.40%
2012 121 111 91.70%
2013 80 78 97.50%
Total 1,320 816 61.80%

Thus, the probability of being sued in a merger today is over 90%.  Keep in mind, however, that the size limitation on their sample is deals over 100 million.  The percentage would undoubtedly be smaller for smaller deals.  Also, as my friend Jan Jindra notes: "The result is, perhaps, not surprising, when private plaintiff attorneys are allowed to initiate class action lawsuits in names of nominal shareholder plaintiffs and finding a willing shareholder plaintiff is made easy and cost-efficient through the use of law firm internet websites. Rational economic agents, attorneys, find that filing a class action lawsuit circumvents the constraints imposed on derivative suits which are designed to limit opportunistic “strike” suits. Furthermore, ready availability of websites by law firms actively recruiting shareholders who have been involved in a merger helps in finding a shareholder plaintiff." See for example the website linked here. "These two ingredients make an increase in merger lawsuits likely."

Certainly there are adequate reasons to have concerns about certain mergers and we've enumerated many in these posts.  Concern over the 'kneejerk' reaction of filing a lawsuit, however, is revealed in "Cash for lawyers - zero for you".  The article reports that over 70% of lawsuits resulted in no payment to shareholders. 

Regardless of the merit of the litigations, the actions definitely increase the costs of mergers. They also increase the need for best practices in corporate governance and in planning and executing the deal.  We'll continue to explore these issues in this blog.


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