Monday, November 28, 2011
Kevin La Croix has a very good post on the rise of transaction related litigation. The rise of transaction related litigation is really incredible:
Reported data (refer for example here and here) show that as recently as ten years ago, there were only a handful of M&A related lawsuits filed each year. For example, in 2001, there were only four M&A related lawsuits filed, compared to the 341 filed in 2010 (up from “only” 191 the year prior). Just in the four- year period ending in 2010, the annual number of merger-related lawsuit filings has increased over 600%.
These numbers are even more startling when it is considered that these lawsuit filings are increasing even as the number of merger transactions is declining. The number of merger targeted companies declined in each of the three years from 2008 to 2010, yet the absolute number of merger-related lawsuits increased in each of those three years relative to the prior year. In 2010, there were 214 fewer companies targeted for mergers than there were in 2007, representing a decline of over 37%. Yet the number of merger-related lawsuits filed in 2010 was more than triple the number filed in 2007. Today, one out of every two companies announcing an acquisition is sued, and that is true whether or not the acquisition is friendly or hostile, and even whether or not the board of the target company has accepted or rejected the proposed acquisition.
The reason? La Croix puts the blame on the lawyers:
And in the M&A related litigation, the plaintiffs’ attorneys seem to have found relatively easy money, as these cases often involve a quick resolution (due to the fact that the parties are often highly motivated to complete the underlying transaction) and the payment of plaintiffs’ attorneys’ fees, which average around $400,000 per case. These attributes of M&A related litigation were discussed in an August 27, 2011 Wall Street Journal article, written from the shareholders’ perspective, entitled “Why Merger Lawsuits Don’t Pay” (here) and in a July 12, 2011 Fox Business article entitled “M&A Lawsuits Skyrocket as Fee-Hungry Law Firms Smell Easy Money” (here).
The surest sign that M&A-related litigation represents an attractive proposition for the plaintiffs’ lawyers is the level of lawsuit competition merger transactions increasingly are engendering. Increasingly, the announcement of a merger can trigger multiple separate lawsuits filed by separate plaintiffs’ firms in multiple separate jurisdictions, producing complicated procedural and jurisdictional issues (refer for example here and here) and also adding dramatically to the cost of litigation.
This is an issue that is increasingly troublesome. If every transaction is accompanied by a transaction tax in the form of litigation - put aside all the jurisdictional issues associated with multi-forum litigation - litigation may begin to lose its potency as a constraining device.
Update: David Marcus at The Deal adds his thoughts to this topic:
In 1999, shareholders filed suit on only 12% of deals, according to William Savitt, a litigation partner at Wachtell, Lipton, Rosen & Katz, who helped organize the [Columbia Law School] conference and presented a paper on shareholder litigation. By 2010, the figure was up to 85%. In the 1990s, only large deals or those involving an obvious potential conflict drew litigation, but now there are shareholder suits on mergers worth less than $100 million and on those in which the target has been fully shopped by an independent board that strikes an arms' length agreement with a third party.