There has been an enormous upswing in shareholder litigation following acquisitions. A survey by Ohio State University professor Steven Davidoff and Securities and Exchange Commission fellow Matthew Cain found that 97.5 percent of acquisition deals of a publicly traded company in 2013 resulted in a shareholder lawsuit, an increase from 39 percent in 2005. Why all the lawsuits? Well, there is money to be had in settling such lawsuits, as the acquirer and seller are very eager to carry on with their deal and not be held up by expensive litigation. Bank Director asked a panel of attorneys whether banks should settle such lawsuits, or fight them to avoid encouraging more lawsuits.
Should banks settle when they are hit with a M&A lawsuit?
The question of whether a bank should settle when hit with a lawsuit in connection with an M&A deal, and if so when, depends heavily on the circumstances. The reality is, however, that these shareholder class action suits are essentially a given in any transaction involving a publicly traded seller. In nearly all cases, regardless of the circumstances, the plaintiffs’ lawyers will assert, first, that the directors breached their fiduciary duties in connection with the sales process that was followed and in accepting the deal terms that were agreed and, two, that the disclosure in the proxy statement issued in connection with the shareholder meeting to approve the transaction is deficient. A well advised board will be aware of this reality and plan accordingly. As a practical matter, these suits rarely are an impediment to a transaction and should certainly not dissuade a board from pursuing a transaction that is in the best interests of the shareholders.
—William L. Taylor, Davis Polk & Wardwell LLP
Like so many questions the answer lies in the particular facts and circumstances. But the automatic inclination to settle these strike suits has dissipated somewhat as management, and more importantly judges, have shown less patience with these types of suits, and as a consequence, awarded increasingly nominal amounts of attorney fees, if any at all. This cottage industry of the plaintiffs’ bar grew up in the era of large bank mergers where these types of suits and settlement amounts were viewed simply as mere nuisances. As the transactional activity has moved to the smaller bank market, so have the plaintiffs lawyers. But these suits have also taken on greater meaning for middle market transactions. The CEO of a bank that intends to engage in multiple acquisitions should seriously consider contesting the first strike suit to send the signal to the plaintiffs’ bar that this bank will not be easy prey.
—Michael Reed, Covington & Burling, LLP
While these actions ostensibly seek monetary relief, such as an increase in the merger consideration, most of them ultimately settle on terms that call for some additional disclosures to the shareholders in advance of the vote on the transaction, and, of course, an attorney’s fee award for the plaintiffs’ lawyers. There are two primary reasons for these settlements. First, the risk, however small, of having a large transaction enjoined or otherwise disrupted is often seen as outweighing the relatively minimal nature of the settlement relief. Second, a settlement is not without its benefits, as, once approved by the court, the settling defendants can obtain a full and complete release of any claims that were or could have been brought by the shareholders in connection with the merger transaction.
—John Bielema and Mike Carey, Bryan Cave LLP
Unfortunately, settling these suits is a necessary evil. Judges are often reluctant to dismiss shareholder suits on the basis of a pre-trial motion, so settling is the only way to avoid the risk of an injunction that blocks the deal or the expense of litigating through trial. Refusing to settle and hoping the plaintiff goes away is probably more of a gamble than the parties are willing to take. The good news is that judges are beginning to doubt the value of many of these disclosure-only settlements in which the companies agree to provide additional disclosure to shareholders, and they are knocking down the attorney’s fees. Reducing the fees that accompany these settlements is the best way to discourage these questionable suits.
—Aaron Kaslow, Kilpatrick Townsend & Stockton LLP
The decision to settle depends, in part, on the nature and size of the deal. Why settle an unmeritorious lawsuit? The threat of delaying a merger transaction can kill the deal, so settling by agreeing to provide some additional disclosures, paying the plaintiffs’ attorneys’ fees and making a token payment to shareholders often makes sense. Acquirers often factor this so-called merger tax into their purchase price considerations to assure that the transaction gets completed. Be careful, though—paying the merger tax can result in higher future directors and officers (D&O) insurance premiums, or larger retentions under those policies. On the other hand, some acquirers in states with favorable business judgment statutes and a reasonable judiciary are fighting unmeritorious lawsuits. Those challenges show an impressive win-loss ratio for boards. Also encouraging is that some courts have dismissed the suits outright or refused to approve settlements and the attorneys’ fees provided in them.
—John Reichert, Godfrey & Kahn, S.C.