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D&O: Shareholders File Suits in More than 90% of M&A Deals


D&O Shareholders File Suits in More than 90% of M&A DealsLawsuits Underscore Importance of Board’s Fiduciary Adherence

A new report released by Cornerstone Research looked at shareholder litigation involving mergers and acquisitions deals from 2007-2013. The report cites that for the fourth consecutive year, shareholders filed suit against public companies in more than 90% of M&A deals valued over $100 million. Moreover, just last year, shareholders challenged 94% of these deals for a total of 612 lawsuits. Also, for the first time, the percentage litigated among smaller deals (valued under $1 billion) and larger deals (over $1 billion) was the same, according to Cornerstone.

We first covered the increase in M&A objection lawsuits back in 2012 when we reported that these types of suits rose from 18 in 2003 to 334 in 2010. Lewis & Clark Law School Professor Jennifer Johnson, who examined a database of class actions filed in state court between 1996 and 2010, found that the number of state court class action lawsuit filings involving M&A transactions has been “skyrocketing” and outnumbers federal securities class action lawsuit filings.

According to the Cornerstone report, most of the M&A lawsuits are in the form of class-action suits and typically allege that targeted company’s board of directors “violated its fiduciary duties by conducting a flawed sales process that failed to maximize shareholder value.” The most common allegations cited in the report include:

  • Failure to conduct a sufficiently competitive sale (transaction is inadequate)
  • Existence of restrictive deal protections, which discouraged additional competitive bids
  • Some or all of the directors have some form of conflict of interest
  • Failure to disclose sufficient information (either inadequate or misleading) about the sale process and the financial advisor’s valuation
  • Failure to exercise due care to maximize the price being offered

The majority of M&A lawsuits over the last four years (after Delaware of Chancery) were in New York County, NY with 39 suits; Santa Clara, CA with 30 suits; and Harris County, TX with 27 suits. In addition, most of the lawsuits – 75% in 2013 – were resolved prior to the M&A deals closing, which is consistent with prior years. The suits were either settled or withdrawn by the plaintiff, or dismissed by the court.

Demonstrating Adherence to Fiduciary Duties

As we see, shareholder litigation over M&A deals is continuing in its upward trend. What is important is that directors and officers demonstrate that they have acted in an informed, deliberate manner when approving a deal and submitting it to shareholders. Here are some considerations, as outlined in an article featured in The Securities Edge, which can help demonstrate that a company’s board is adhering to its fiduciary responsibilities.

  • Avoid any conflicts of interestBe sure to inquire about any potential conflicts right at the onset of the M&A process. If a director has a real or potential conflict of interest, the board should consider appointing a special committee of independent and impartial directors to evaluate the transaction on an arm’s-length basis and negotiate on behalf of the company.
  • Be involved in the sales process. Be sure in evaluating the terms of a deal that board members ask hard questions and challenge the assumptions of management in an effort to ensure all aspects have been considered, including whether the deal is in line with your overall corporate strategy. Ensure that records show that the board met periodically throughout the sales process, was appropriately advised by outside advisors and exercised informed judgment on critical decisions when it mattered.
  • Document, document, document, and be detailed. A company’s documentation of the board’s processes (including minutes from meetings) should reflect the earnestness, diligence and care with which directors have approached their task. Also, directors should proceed with caution when sending private emails or personal notes. These are often subject to discovery in merger-related litigation, and can be taken out of context by plaintiff’s lawyers, undermining the appearance of good process.
  • Retain qualified advisors. Obtain advice from experienced, qualified and independent experts in each of the relevant substantive areas.
  • Announcing transaction. Be sure to manage the timing and content of disclosures of the transaction in order to try to minimize disclosure-related risks.

There are also a number of transaction-related pre-litigation strategies a company can implement to improve its ability to defend litigation. A recent paper from Chubb Insurance, entitled “Director Liability Loss Prevention in Mergers and Acquisitions”, recommends among other things: amending the by-laws to designate a specific jurisdiction as the exclusive venue for shareholder suits involving governance issues; retaining qualified defense counsel in advance of the transaction; and developing an external communication protocol to reduce disclosure –related risks.

At Axis Insurance Services, we can help structure an appropriate D&O insurance program to address the complex issues involved with M&A transactions. Talk to the D&O experts at Axis Insurance Services about your insurance coverage. Give us a call at (877) 787-5258.

Sources: Cornerstone Research, Securities Edge, Chubb Insurance

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Blogged on: March 20, 2014 by Mike Smith
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