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M&A Objection Suits Increasingly Hitting Directors & Officers

The number of merger objection lawsuits filed in the U.S. rose from 18 to 2003 to 334 in 2010, even as the number of M&A transactions decreased during the recession, according to research firm Advisen. This upward trend is underscored in an article, “Securities Class Action Lawsuits in State Court”, by Lewis & Clark Law School Professor Jennifer Johnson, who examined a database of class actions filed in state court between 1996 and 2010. Her analysis shows that the number of state court class action lawsuit filings involving M&A transactions has been “skyrocketing” and now even outnumber federal securities class action lawsuit filings.

In M&A objection lawsuits, shareholders allege that the directors and officers of a company were not looking out for their best interest when they agreed to the terms and conditions of a transaction. And while lawsuits as a result of M&A activity are more common for public companies, private companies and their directors and officers are not immune. Minority shareholders, who are often employees, typically claim that shareholders/board members of the private entity pursued a deal that benefited them at the expense of minority shareholders. Sometimes a suit can also involve a partner who claims to have been damaged because of a merger, and sues for breach of contract or tortuous interference.

Why are directors so vulnerable to these types of suits?

When a company becomes involved in an actual or proposed merger or acquisition, its directors have to make the decision to approve or reject the transaction, which will likely disappoint some constituents who can—and frequently do—sue the directors for alleged wrongdoing in connection with the transaction. A lot of money is at stake, and particularly during a recession where more deals are being done at “depressed prices relative to pre-recession valuations and shareholders are sometimes dissatisfied with the outcome,” according to the Advisen report. In addition, some feel that with fewer securities class action lawsuits being filed, lawyers representing shareholders in merger objection cases are after the attorney fee awards that often accompany decisions in the plaintiffs’ favor, which amount to around $500,000 per case, on average, according to the report.

Directors & Officers insurance is designed to protect the company, directors and officers, and key executives against the potential consequences of alleged wrongdoings, such as financial mismanagement, misappropriation of funds, and negligence. It provides the much-needed protection needed against the costs of legal defense and indemnity coverage for the business, directors and officers, and employees in suits alleging internal mismanagement. Talk to the D&O experts at Axis Insurance Services about your coverage. Give us a call at (877) 787-5258.

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Blogged on: January 3, 2012 by Mike Smith
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