At 7 a.m. on March 13, the hedge fund Apollo Global Management announced that it would acquire Great Wolf Resorts, Inc., for $5 a share — a 50 percent premium over the average share price during the previous 90 days for the Madison, Wisconsin – based water park operator. Within five hours, eight law firms in different states had issued press releases saying that they were investigating the $703 million deal for evidence that directors breached their fiduciary duty by failing to seek a better deal. They urged potential plaintiffs to get in touch.
Both the threat of the suits, and the speed with which they were announced, are part of the booming trend of merger objection litigation. According to a new analysis by law professors Matthew Cain of the University of Notre Dame and Steven Davidoff of Ohio State University, 94 percent of M&A deals over $100 million last year faced litigation — up from 85 percent in 2010. Cain and Davidoff found that, on average, 4.8 lawsuits were filed per deal.
Other studies have confirmed the trend. “It has become part of the economic analysis for a large transaction to factor in litigation costs,” says P. Blake Allen, a M&A partner in the San Diego office of Duane Morris who has written about merger objection litigation.
Speed is of the essence for the lawyers who bring these suits, since they’re eager to be named lead counsel if a class action is certified. “You see suits filed before the proxy statement is even presented — before there’s much information available,” says Allen. According to a 2011 study by Marcia Mayer of NERA Economic Consulting and Douglas Clark of Wilson Sonsini Goodrich & Rosati, 33 percent of these class actions are filed within two days of the merger announcement, and an additional 26 percent within seven days.
The Boston firm Block & Leviton was first off the mark to announce an investigation into the Great Wolf deal — arguing that the company could be worth at least $6 a share. Name partner Jason Leviton says that speed is necessary to give investors an opportunity to object, because deals often close within four weeks. (Apollo’s counsel at Akin, Gump, Strauss, Hauer & Feld declined to comment, and Great Wolf’s lawyers at Paul, Weiss, Rifkind, Wharton & Garrison did not respond to requests for comment.) However, at least two lawsuits were immediately filed.
Leviton says that there are several red flags that may trigger an investigation. One is an offer that represents a low premium over the share price the acquiror is willing to pay; a premium of only 10 – 20 percent may arouse suspicion. What other bidders were willing to pay is another factor: If the stock price has risen steadily over time, but the premium is based on a temporary slump, the premium may appear higher than it actually is.
But while the lawyers who file these suits claim that they’re acting on behalf of shareholders, the attorneys themselves often benefit the most. According to the NERA study, 87 percent of the monetary settlement in deals worth more than $100 million between 2006 and 2010 went to plaintiffs attorneys alone. In only 9 percent of cases did class members share in the financial benefits of litigation. The main result of most merger objection litigation is increased disclosure by the parties in the deal. According to an analysis by Cornerstone Research of 2010 – 11 deals, 82 percent “settled for additional disclosures or, less frequently, changes in merger terms, such as deal protection provisions.”
NERA’s Mayer says, “Much of this litigation does not serve any public purpose. It has become a dependable income stream for many plaintiffs law firms.”
However, Mark Lebovitch, a partner with plaintiffs firm Bernstein Litowitz Berger & Grossman in New York, emphasizes that despite some “bad apples,” there are many ethical law firms that aggressively represent shareholder interests in challenging M&A deals, exposing real wrongdoing by CEOs and board members and achieving significant recoveries for shareholders. He cites recent Delaware cases like Kinder Morgan Inc’s. controversial takeover of El Paso Corp., which involved potential conflicts of interest among investment bankers.
“Corporate CEOs and directors routinely hire the best lawyers in the world to move the law in their favor,” Lebovitch says. “Litigation is a way to try and give more balance to shareholders’ rights, improve corporate governance practices, and provide a meaningful counterweight to overreaching on the corporate side.”