The number of litigations on M&A deals has increased massively in recent years, with 93% of deals challenged by litigation in 2014, research by Cornerstone Research shows. The main driver for litigation is the target’s board of directors violating their fiduciary duties by conducting a flawed sales process that failed to maximise shareholder value. The research also shows that most litigation is resolved before the deal is closed and for the most part results in increased disclosures.
In a recently research report litigation consulting firm Cornerstone Research, titled ‘Shareholder Litigation Involving Acquisitions of Public Companies’, the litigation challenging M&A deals valued over $100 million announced between 2007 and 2014 is mapped out. The report discloses the lawsuit filings, outcomes, and settlement terms.
The lawsuits under consideration in the report were filed by shareholders of public target companies, and usually take the form of a class action. There were a number of reasons for litigation. One typical allegation centred around the target’s board of directors violating their fiduciary duties by conducting a flawed sales process that failed to maximise shareholder value. Such behaviour results in the failure to conduct a sufficiently competitive sale, the existence of restrictive deal protections that discouraged additional bids, and conflicts of interest, such as executive retention post-merger or change-of-control payments to executives. Another typical allegation is that the target board failed to disclose enough information about the sale process and the financial advisor’s valuation.
Deals challenged on the rise
In terms of the number of litigations surrounding M&A deals in recent years, shareholders have become more active in their litigation. In 2007, only 44% of M&A deals were challenged by shareholders, before increasing to 54% in 2008. In 2009, however, the number of deals challenged jump massively to 89% and has since hovered between 90-95%. Last year, plaintive attorneys filed lawsuits in 93% of M&A deals valued over $100 million, amounting to 608 deals.
Number of litigations
Whereas the level of litigation has held steady at around 90% since 2009, there has been a yearly variability in the number of lawsuits filed per M&A deal. Since 2007, the number of lawsuits has been on the increase, growing from 2.8 per deal in 2007 to 4.4 in 2009. At its height in 2011, the number was up to an average of 5.4 suits per deal. In 2014, the total lawsuits decreased slightly to 4.5 per deal, down from 5.2 in 2013. The average for deals over $1 billion fell from 6.2 in 2013 to 5.7 in 2014 and for smaller deals from 4.4 in 2013 to 3.2 in 2014.
The settlement rate before the M&A deals are closed also increased. In 2007, only 66% of litigations were resolved by the closing date, dropping to 54% in 2008. By 2009, this increased to 78% a trend that has stayed on throughout recent years. However, in 2014 the number of cases resolved before closure again dropped significantly to 59%. Most cases were either settled or voluntarily dismissed. In 2012, for instance, 73% of cases were settled, 5% were dismissed by the courts, 16% were voluntarily dismissed and the rest either pending or the result unknown.
In terms of how the cases were resolved, for the most part the resolution was in terms of further disclosure – 75% in 2013 and 79% in 2014. Monetary resolution made up 8% of cases in 2014 and 9% of the 2014 settlements included changes to deal protection provisions in the merger agreements.