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. Ralph

Shareholder Lawsuits May Prove More Costly

We've noted the likelihood of being sued after completing a deal, especially a large one.  An article in the Wall Street Journal suggests that a recent court ruling may make those suits less attractive to plaintiffs lawyers.  In particular, companies are adopting a clause that requires plaintiffs to pay the firms legal fees if a suit fails.  The court upheld a bylaw a company had adopted requiring such payments.   The article also reveals declining awards for plaintiffs' attorneys over recent years. 

All the best,

Ralph

Delaware, Lawsuits and Firm Value

In a previous post we noted "Doing a Large Deal:  Expect to Get Sued".  Suing corporations just got a little tougher recently.  Chancellor Leo Strine of the Delaware Court of Chancery ruled that boards can adopt bylaws that require most lawsuits to be filed in Delaware.  This restricts lawsuits filed in multiple courts and also gives corporations headquartered in Delaware what some experts have called a 'home field advantage'.  A Thomson Reuters version of this story can be read here.

Delaware is known to be pro-business and it's rapid litigation schedule and fairly low fee awards.

Yet I am reminded of empirical studies that show firms relocating to Delaware are met with increased stock returns at the announcement of the move and of this study by Robert Daines that shows firms incorporated in Delaware have increased value.

"Does Delaware Law Improve Firm Value?"

by Robert Daines

November 1999

Abstract:      

I present evidence that Delaware corporate law improves firm value and facilitates the sale of public firms. Using Tobin?s Q as an estimate of firm value, I find Delaware firms are worth significantly more than similar firms incorporated elsewhere. The result is robust to controls for firm size, diversification, profitability, investment opportunity and industry. Delaware firms also receive significantly more takeover bids and are significantly more likely to be acquired. Firms with strong incentives to choose valuable legal regimes are likely to incorporate in Delaware when they go public. These results suggest that corporate law affects firm value.

The complete article can be downloaded here.

All the best,

Ralph

Doing a (Large) Deal? Expect to Get Sued

A recent working paper by Matthew D. Cain  and Steven M. Davidoff entitled Takeover Litigation in 2012 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 92% involved litigation in 2012. Table A: Litigation rates over time  Deals # Litigation           % 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 84 77 91.70% Total 1,203 705 58.60% Thus, the probability of being sued in a merger 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. Ralph ----