Firms that announce a merger or acquisition almost always find a headache to go along with it: lawsuits by shareholders of the acquired company seeking more information or claiming the price is too low.
Observers say because of pressure to complete these deals, these merger objection cases are generally settled relatively quickly, with companies often providing additional information, sometimes changing terms of the deal and almost always paying plaintiffs attorneys amounts that often are substantial.
However, most settlements (see story, page 15) do not involve compensation to the plaintiff shareholders themselves, experts say.
These are high-frequency, low-severity claims. But the frequency problem has reached the point where many directors and officers liability primary insurers are seeking separate, higher deductibles for these M&A suits that in some cases amount to multiples of the general D&O policies' self-insured retentions.
Unfortunately, say many observers, there is relatively little, if anything, that companies can do to avoid these lawsuits (see story above). But providing as much information as possible initially may minimize their impact.
According to a March 2012 study by Boston-based Cornerstone Research, 91% of deals valued at more than $100 million sparked an M&A lawsuit. Merger objection cases accounted for 31% of all federal filings in 2010, according to a report issued by New York-based consulting firm NERA Economic Consulting.
“The M&A suits are really bedeviling both corporate America and their D&O carriers,” said Ann Longmore, New York-based executive vice president of FINEX North America, a unit of Willis North America Inc.
“It's created a cottage industry of plaintiffs attorneys looking to file a quick-strike lawsuit” and enhance their revenue streams, said Trevor Howard, New York-based senior vice president of U.S. management liability for Liberty International Underwriters.
Plaintiffs firms often move quickly. A report by NERA, for instance, said that at 7 a.m. on Sept. 12, 2011, Irvine, Calif.-based Broadcom Corp. announced its $3.7 billion purchase of Santa Clara, Calif.-based NetLogic Microsystems Inc.; and at 10:18 a.m. the same day, a plaintiffs law firm announced it was investigating whether NetLogic had breached its fiduciary duty in agreeing to the sale.
Other law firms' announcements quickly followed. Four days later, two lawsuits were filed. Both eventually were settled, for terms that included $795,000 in attorneys' fees for one of the lawsuits, according to NERA.
Plaintiff attorneys' fees in these cases of between $200,000 and $800,000 “are not unusual,” said Ms. Longmore.
These lawsuits are “low-hanging fruit,” said Joseph P. Monteleone, a partner with law firm Tressler L.L.P. in Chicago. “It is very easy for even a minimally qualified plaintiff to file one of these suits.”