What is it?
Increasingly, shareholders are filing lawsuits to challenge M&A transactions. The litigation often takes the form of a class action, with plaintiff’s counsel alleging a breach of fiduciary duty on the part of the target’s board of directors resulting in a failure to maximize shareholder value. The specifics of the complaint are typically related to the process followed, the price agreed to, or insufficiency of disclosure.
In the U.S., post-deal litigation has become the rule, with roughly 96% of transactions post-2008 being accompanied by litigation, up from 53% pre-2008. Though this type of litigation is not nearly as common in Canada, it still occurs and is likely to increase in regularity, especially in tough markets.
How can dealmakers mitigate the risk of its occurrence?
Unfortunately, no matter how precisely crafted the agreements, the simple fact of having closed a large transaction will in some cases be enough to attract litigious shareholders (and counsel). Other times, however, it is the valuation process or the wording of the contracts which creates shareholder tension manifesting as post-closing litigation. Notwithstanding, some general areas for improvement include:
- the proper definition of key terms, rather than defining a term by reference to another standard (such as GAAP, for example);
- inserting explicit formulas and mechanisms into the agreements for valuation and adjustments; and
- testing valuation and adjustment mechanisms alongside an expert to ensure they operate as intended.
Most importantly, when drafting a provision or creating a process or choosing a mechanism, consider how it could be challenged. If you had to defend it, could you? In the PWC article, Steve Tenai, a litigator here at Norton Rose Fulbright Canada LLP, put it well when he said, “That doesn’t mean perfection… but it does mean… you need to give some regard to what will happen if someone comes along later and challenges this deal.”
The author would like to thank Jad Debs, articling student, for his assistance in preparing this legal update.