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Robert Daines
It was a rare merger or acquisition deal in 2012 that escaped legal challenges from shareholders, according to a study released Thursday by Cornerstone Research, which specializes in analyzing financial issues in commercial litigation and regulatory proceedings.
Some 96 percent of M&A deals valued over $500 million and 93 percent of those valued over $100 million engendered suits, according to “Shareholder Litigation Involving Mergers and Acquisitions” [PDF].
The report was co-authored by Olga Koumrian, a principal of Cornerstone, along with business and law professor Robert Daines of the Stanford Law School. Daines is also co-director of Stanford’s Rock Center on Corporate Governance.
“Death, taxes, and deal litigation are the three most inescapable things,” Daines told CorpCounsel.com. “Essentially nearly all merger deals get challenged.”
He said it’s not likely that all of these boards did a poor job in selling their firms. “The question is whether we can tell the good cases from the bad ones, and whether the threat of a lawsuit produces benefits for shareholders,” Daines added.
On average, the deals attracted more than 4.8 suits per transaction, with some filed within hours after an announcement. The average time between announcement of a deal and commencement of a legal challenge was 14 days, the report said.
It said most cases settled, usually within 42 days, and most plaintiffs received only additional disclosures and no monetary compensation.
However, there were some exceptions worth noting. In fact, two of the largest M&A settlements in recent years occurred last year, one for $110 million in the El Paso Corp./Kinder Morgan Inc. deal, and the other for $49 million in the acquisition of Delphi Financial Group Inc. by Tokio Marine Holdings Inc.
Cornerstone also researched the largest settlements of the last decade and found these deals have steadily increased in size over the years. The average settlement fund between 2010 and 2012 was $78 million, compared with $36 million in 2003 through 2009, the report said.
The authors said most of the large settlements involved allegations of significant conflicts of interest, such as Delphi’s chief executive negotiating a premium for the share class he owned; and El Paso’s chief executive negotiating side deals with acquirers to purchase some of the targets’ assets. Plus El Paso’s financial adviser, the Goldman Sachs Group Inc., received a court scolding because it owned 19 percent of the acquirer, Kinder Morgan, while representing the other side, El Paso.
In other findings, the report said:
- Plaintiff attorney fee awards appear to be influenced by the size of the settlement fund, other monetary benefits to shareholders, number of suits filed, time to settlement, and overall deal value.
- The average agreed-upon plaintiff attorney fee was $725,000. Of the 27 disclosed fee amounts, only three were $1 million or more; the largest fee was $3.9 million.
- The average plaintiff fee requested in settlements that resulted only in supplemental disclosures declined in 2012 for the third year in a row.
- The proportion of suits filed in the Delaware Court of Chancery grew in 2011 and again in 2012, drawing filings away from federal and other state courts. In 2009, state courts had 64 percent of all filings, but by 2012 that number dropped to 53 percent.
- Plaintiff attorneys are increasingly filing a new type of lawsuit modeled after M&A litigation, but these suits challenge the adequacy of compensation disclosures included in annual proxy statements.
