Sunday, December 12, 2010
Litigation in Mergers and Acquisitions, by C. N. V. Krishnan, Case Western Reserve University - Department of Banking & Finance; Ronald W. Masulis, University of New South Wales (UNSW) - School of Banking and Finance ; Vanderbilt University - Owen Graduate School of Management; Vanderbilt Law School; Randall S. Thomas, Vanderbilt Law School; and Robert B. Thompson, Georgetown University Law Center, was recently posted on SSRN. Here is the abstract:
Using hand-collected data, we examine the targeting of lawsuits in M&A transactions, the effect of these suits on offer completion rates and takeover premiums, and the factors that lead to positive settlement outcomes in these cases. Shareholder lawsuits form the vast majority of all lawsuits. We find that after controlling for offer features, M&A financial and legal advisor reputation, and industry and time fixed effects, as well as selection bias, M&A offers that are subject to lawsuits are completed at a significantly lower rate than offers that are not subject to litigation. However, litigation significantly increases the takeover premium in deals that are completed. Economically, the expected rise in the takeover premium more than offsets the expected fall in the probability of deal completion, so there is a rise in the expected takeover premium paid in offers that are subject to pre-deal-completion litigation. Examining the different types of lawsuits, suits challenging controlling shareholder squeeze-outs are significantly more likely to lead to settlement and to the payment of cash consideration upon settlement. Target lawsuits, generally designed to impede deal completion, are significantly and positively associated with the takeover premium if the deal is completed.