Last month, Cornerstone Research published a report titled Shareholder Litigation Involving Mergers and Acquisitions – Review of 2013 M&A Litigation, the first report in a 2-part series aimed at assessing trends involving lawsuits filed by shareholders of public target companies which challenge M&A transactions valued over $100 million. The purpose of the report was to consider litigation (usually in the form of a class action) for the period from 2007 to 2013 wherein plaintiff’s counsel would challenge an M&A deal on the basis that the target’s board of directors conducted a flawed sales process which neglected to maximize shareholder value, thereby violating its fiduciary duties.
According to the report, for the fourth consecutive year, shareholder lawsuits are filed in over 90% of M&A deals valued in excess of $100 million: shareholders challenged 90% of deals in 2010, 93% of deals in both 2011 and 2012, and 94% of all M&A transactions announced in 2013. In 2013, most of the applicable transactions attracted multiple filings — an average of 5 lawsuits each — and over 62% of the litigation was multi-jurisdictional, with 54% of 2013 deals being litigated in 2 jurisdictions and 8% of 2013 deals being litigated in 3 jurisdictions. Interestingly, last year marked the first time that litigation filing rates were the same for transactions valued under $1 billion and those values in excess of $1 billion.
The report noted that the most common allegations made by shareholders included:
- failure to conduct a sufficiently competitive sale
- the existence of restrictive deal protections that discouraged additional bids
- perceived conflicts of interest, such as executive retention or change-of control payments to executives
- failure to disclose enough information about the sale process and the financial advisor’s valuation
No matter the nature of the allegations, the report set out the following key litigation outcomes for the period from 2007 to 2013:
- Litigation was resolved before the transaction closed in the vast majority of cases, ranging from 60% of the time (in 2006) to 79% (in 2012)
- Litigation resolved at a rate of 75% in 2013 and, of such resolved suits, 88% were settled, 9% were withdrawn by the plaintiffs, and 3% were dismissed by the courts
- Although the majority of M&A litigation settled, suits that were not resolved before the transaction closed remained pending for as long as 4 years
- Based on the data available to Cornerstone, none of the litigation went to trial, and all judgments were granted in favour of the defendants