Merrill DataSite Releases New Article: Is the Rise in Post-Deal Litigation a Cause for Concern?

Share Article --M&A deals that take place in the US are becoming increasingly expensive for the companies being bought. Why? Because of a growing trend for legal cases being brought against boards of directors and the concerning frequency with which the firms settle the cases at the shareholders' expense.

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M&A deals that take place in the US are becoming increasingly expensive for the companies being bought. Why? Because of a growing trend for legal cases being brought against boards of directors and the concerning frequency with which the firms settle the cases at the shareholders' expense.

Figures from Cornerstone Research, recently cited in an expose feature in the Financial Times, found that 96 per cent of US mergers and acquisitions valued at more than $500 million, were challenged in court in 2011. This compared with just 72 per cent in 2008 and 53 per cent the year before that.

The situation has changed in recent years to the point where almost all M&A deals are challenged and these suits are, in most cases, filed by the legal firms representing the target business’s shareholders within a week. The legal firms homing in on the opportunity to make money from these types of cases know that the first law firm to file a case will usually receive the majority of any settlement. The FT’s article on the subject talks about how this ‘race to file’ trend is an ever greater incentive for lawyers to sue before they have a real case.

The growing number of such challenges, the FT’s David Gelles claims, is symptomatic of a weakness in the corporate law system in the US. Although the vast majority of the deals that result in cases manage to gain the best price for the shareholders involved, the system seems to encourage these shareholders to sue their board ‘just in case’ something was overlooked or a wrongdoing took place during the deal-making process.

This could be all well and good, Gelles adds, if the cases usually resulted in unusual activity being traced and shareholders receiving better deals. However, the reality of the situation is that 67 per cent of the cases that are brought wind up being settled out of court, according to the report from Cornerstone. These settlements tend to be negotiated behind closed doors, with no involvements from the shareholders themselves and also, more often than not, result only in an agreement among the board to pay the legal fees to the plaintiff’s law firm that filed the case in the first place.

The settlements often occur after the board reveals a small detail about the deal that might not have been revealed earlier, but that would barely have affected the deal price. In fact, the litigation issue is becoming so widespread that some boards are reportedly keeping back some information on purpose just so they have something inconsequential to reveal in advance of the inevitable settlement.

Although this situation is obviously a negative one to many onlookers, some claim that the trend does help to deter boards from committing wrongdoings during the deal process and helps to encourage transparency in the deal-making process. However, others claim that the cases are not making nearly enough impact to warrant the continuation of such a development.

One solution would be for the boards to simply stop settling these cases. However, fighting them through the courts would be more expensive and time-consuming than settling. Robert Daines, the co-author of the Cornerstone Report, which first exposed this disturbing trend, explained, “As long as there are gains to settling, there will be gains to bringing the suit in the first place.”

Critics of the practice are now turning to word-of-mouth to try to raise awareness of the issue in the hope that something will be done to try to reverse the trend, which threatens to undermine due diligence and negotiation processes in the US.

About Merrill DataSite
Merrill DataSite is a secure virtual data room (VDR) solution that optimizes the due diligence process by providing a highly efficient and secure method for sharing key business information between multiple parties. Merrill DataSite provides unlimited access for users worldwide, as well as real-time activity reports, site-wide search at the document level, enhanced communications through the Q&A feature and superior project management service - all of which help reduce transaction time and expense. Merrill DataSite’s multilingual support staff is available from anywhere in the world, 24/7, and can have your VDR up and running with thousands of pages loaded within 24 hours or less.
With its deep roots in transaction and compliance services, Merrill Corporation has a cultural, organization-wide discipline in the management and processing of confidential content. Merrill DataSite is the first VDR provider to understand customer and industry needs by earning an ISO/IEC 27001:2005 certificate of registration – the highest standard for information security – and is currently the world’s only VDR certified for operations in the United States, Europe and Asia.
As the leading provider of VDR solutions, Merrill DataSite has empowered nearly 2 million unique visitors to perform electronic due diligence on thousands of transaction totaling trillions of dollars in asset value. Merrill DataSite VDR solution has become an essential tool in an efficient and legally defensible process for completing multiple types of financial transactions.

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Catherine Malone
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