M&A Deals: Shareholder Litigation Involving Acquisitions of Public Companies via Cornerstone Research
This report looks at litigation challenging M&A deals valued over $100 million announced from 2007 through 2014, filed by shareholders of public target companies.
These lawsuits usually take the form of a class action. Plaintiff attorneys typically allege that the target’s board of directors violated its fiduciary duties by conducting a flawed sales process that failed to maximize shareholder value. Common allegations include the failure to conduct a sufficiently competitive sale, the existence of restrictive deal protections that discouraged additional bids, and conflicts of interest, such as executive retention postmerger or change-of-control payments to executives. Another typical allegation is that the target board failed to disclose enough information about the sale process and the financial advisor’s valuation.
This report discusses lawsuit filings, outcomes, and settlement terms. A forthcoming report will discuss plaintiff attorney fees.
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There are signs that shareholder M&A litigation subsided slightly in 2014. Although 93 percent of M&A deals valued over $100 million were litigated, plaintiffs brought a smaller number of competing lawsuits for the same deal and in fewer competing jurisdictions, challenged fewer deals valued below $1 billion, and took slightly longer to file a lawsuit.
- Unlike recent years, the majority of litigation for 2014 deals was filed in only one jurisdiction (60 percent). This is likely a result of widespread adoption of forum selection clauses in corporate bylaws. Just 4 percent of the deals were challenged in more than two courts, the lowest number since 2007.
- The average number of lawsuits per deal declined, from 5.2 in 2013 to 4.5 in 2014.
- In 2014, 59 percent of lawsuits were resolved before deals closed, compared with 74 percent in 2013. The 2014 percentage was the lowest since 2008.
- Only one M&A case in the data went to trial in 2014; it resulted in a $76 million damages award.
- Similar to prior years, almost 80 percent of settlements reached in 2014 provided only additional disclosures. Just six settlements involved payments to shareholders.
- Plaintiff attorneys filed lawsuits in 93 percent of all M&A deals announced in 2014 and valued over $100 million, a total of 608 lawsuits.
- The percentage of deals challenged in litigation remained high at 96 percent for deals valued over $1 billion, but declined for deals valued under $1 billion, from 94 percent in 2013 to 89 percent in 2014.
- For all deals, the average number of lawsuits per deal declined to 4.5, the lowest level since 2009 (Figure 2).
- The average number of lawsuits per deal declined for both larger (valued over $1 billion) and smaller (valued under $1 billion) deals—5.7 for larger deals (compared with 6.2 in 2013) and 3.2 for smaller deals (compared with 4.4 in 2013).
- The number of deals with more than 10 filings decreased, from 14 in 2013 to nine in 2014.
- Lawsuits were filed more slowly in 2014. The first lawsuit was filed an average of 14 days after the deal announcement, compared with 11 days in both 2012 and 2013.
- In 2014, 60 percent of M&A litigation was filed in only one jurisdiction. This is a reversal from the 2009 to 2013 period, when multi-jurisdictional litigation prevailed (Figure 3). This is likely a result of widespread adoption of forum provisions in corporate bylaws, which specify exclusive jurisdiction for lawsuits alleging breach of fiduciary duties. More than 300 companies adopted such provisions in 2013 and 2014.
- Only 4 percent of 2014 deals were challenged in three or more jurisdictions, down from a peak of 20 percent in 2011.
- For acquisitions of Delaware-incorporated companies, the Delaware Court of Chancery gained ground as a filing destination, likely reflecting the choice of this court as the exclusive litigation forum. Plaintiffs filed in Delaware for 88 percent of the deals, close to 82 percent at its peak two years ago (Figure 4).
- In each of the previous five years, over 70 percent of litigation was resolved before deal closing. In 2014, however, only 59 percent of such deals reached a litigation outcome. It remains to be seen whether plaintiffs are successful in post-closing M&A litigation.
- Overall, the majority of the resolved 2014 M&A litigation settled, consistent with prior years (Figure 5).
- Historically, of litigation that was resolved before deal closing, close to 90 percent settled, and the remainder was either withdrawn by plaintiffs or dismissed by courts. In cases for which litigation was resolved after a merger closing, only 15 to 20 percent reached a settlement; the majority was either dropped by plaintiffs or dismissed by the courts.
- Only one lawsuit proceeded to trial in 2014. This case was related to the 2011 buyout of Rural/Metro Corp. by Warburg Pincus LLC. While Rural/Metro’s directors and one of its advisors settled for $11.6 million, another advisor, RBC Capital Markets LLC, decided to litigate. In March 2014, Vice Chancellor J. Travis Laster of the Delaware Court of
Chancery ruled that RBC was liable because it planned to provide financing to the acquirer, without telling the Rural/Metro directors, and in October awarded damages of $75.8 million.
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