Why M&A Suits Are Now an Epidemic
And what a CFO can do to reduce the chance of having deals victimized by them.
When Motorola Mobility Holdings Inc. announced its $12.5-billion acquisition by Google last Aug. 15 – at a $40-a-share price that represented a 63% premium over pre-deal trading – it seemed to most observers a pretty good deal for shareholders. But two days later, the inevitable investor suit was filed.
On behalf of all investors, the suit named Motorola Mobility, CEO Sanjay Jha, its board, and Google, saying the price didn’t “compensate shareholders for the company's intrinsic value and stand-alone alternatives going forward, nor does it compensate shareholders for the company's value as a strategic asset for Google."
The suit now has been settled, with the terms undisclosed. But behind the case is a much bigger story.
“There used to be a fair to good chance that if a deal was announced, an M&A lawsuit would be filed. Now, it’s a virtual certainty,” says attorney Norman Blears, a partner in the Silicon Valley office of Hogan Lovells. “Plaintiffs’ firms enter a race to adjudication.”
Adds Guarav Jetley, vice president with Analysis Group, economic and financial consultants“Most of these are almost automatic. A company announces an action, and within a day or days, the lawsuits are filed.”
Surpassing 'Stock Drop' Suits
Indeed, the number of lawsuits alleging some sort of corporate merger-and-acquisition wrongdoing is now much higher than it was just a few years ago, with 311 shareholder suits having been filed this year, through early December 2011, according to Luke Green, vice president of the Securities Class Action Services subsidiary of Institutional Shareholder Services Inc. While that’s a bit lower than the 341 filed in 2010, it's about 60% higher than the 191 filed in 2009, and nearly nine times the 36 suits filed in 2008.
Further, a single transaction sometimes generates challenges in multiple jurisdictions -- often including the incorporation haven state of Delaware. And one professor calculates that M&A suits have become the most common type of business litigation, now surpassing the filings that grow from stock-price drops.
What that means, of course, is that CFOs preparing for a merger or acquisition must put a higher-than-ever priority on preparing for those legal challenges. Further, they must account for how the need to defend against these suits increases the risk of inconsistent results. “The suits can be a huge impediment to moving mergers forward,” says Edward Welch, a securities attorney with Skadden, Arps, Slate, Meagher & Flom LLP, noting that one court may decide one way on a case, while another decides differently.
