In several recent posts (most recently here), I have written about the problems associated with the growing wave of M&A related litigation. In writing about this topic, I have tried to marshal the evidence supporting my position, but for many reasons my analysis has been more descriptive than statistical. However, I have been provided with advance access to some of the data from a forthcoming Cornerstone Research publication to be entitled “Recent Developments in Shareholder Litigation Involving Mergers and Acquisitions.” The data provide interesting additional statistical perspective on the recent M&A-related litigation trends.
UPDATE (as of Jan. 17, 2012): Cornerstone has now released its report, entitled "Recent Develpments in Shareholder Litigation Involving Merger and Acquisitions" (here) online. The full report iincludes additional information beyond what is discussed in this blog post.
In their preparation of the report, Cornerstone Research reviewed SEC filings related to acquisitions of U.S. public companies valued at $100 million or greater and announced during 2010 and 2011. For purposes of historical comparison, Cornerstone Research also collected information on litigation related to deals announced in 2007 valued at $500 million or greater.
Based on their review, Cornerstone Research identified 789 lawsuits filed in connection with U.S. public company acquisition transactions valued at $100 million or greater and announced in 2010 and 696 lawsuits for deals of that size announced in 2011.
Cornerstone Research found that litigation arose in connection with 91% of all deals announced during the 2010-2011 period with values greater than $100 million. The average number of lawsuits per deal announced during that period was 5.1. Both of these figures grow relatively larger as the size of the deals grows larger. Thus for deals announced in 2010-2011 with valuations between $100 million to $500 million percentage of deals involving litigation is 85%, and the average number of lawsuits per deal is 4.1, while 96% of all deals valued over $1 billion during that period attracted litigation, and averaged 6.1 lawsuits per deal.
Certain deals announced during the 2010-2011 proved to be particularly litigation attractive. For example, Blackstone’s $600 million acquisition of Dynegy attracted 29 lawsuits. Express Scripts’ $29.3 billion acquisition of Medco Health Solutions attracted 22 lawsuits. Attachmate’s $2.2 billion acquisition of Novell attracted 19 lawsuits. Overall, there were nine deals during that period valued at $100 million or greater that attracted 15 or more lawsuits.
To provide historical perspective, Cornerstone Research compared M&A litigation in 2007 and in the 2010-2011 periods, by comparing deals valued greater than $500 million announced in each of those two periods. There were 289 lawsuits in connection involving deals of that size in 2007 and 557 involving deals of that size in 2010, representing a 92% growth in the absolute number of lawsuits between the two periods. There were 473 lawsuits involving deals of that size that were announced in 2011, which is 63% higher than in connection with deals of that size announced in 2007.
Obviously, this growth in the absolute number of lawsuits might be attributable to an increase in the level of M&A activity involving deals greater than $500 million. In fact, there were 195 deals valued over $500 million that were announced in 2007, but only 108 and 80 deals valued over $500 million that were announced in 2010 and 2011, respectively.
The Cornerstone Research analysis shows that only 50% of the deals valued at $500 million or greater announced in 2007 attracted litigation, whereas 95% of the comparably sized deals announced in 2010 attracted litigation, and 96% of such deals announced in 2011 attracted litigation. In other words, the litigation activity was both absolutely and relatively greater for deals valued at $500 million or greater in the 2010-2011 period compared with comparably sized deals announced in 2007.
In addition, the number of lawsuits filed per deal has also increased. Deals valued at greater than $500 million announced in 2007 attracted an average of 2.8 lawsuits, whereas deals of that size announced in 2010 attracted an average of 5.4 lawsuits, and deals of that size announced during 2011 attracted an average of 6.1 lawsuits.
One of the recurring questions associated with the increase in M&A-related litigation has been whether or not courts in Delaware, traditionally the forum of choice for this type of litigation, has been losing “market share” to other jurisdictions that may be perceived as more plaintiff-friendly. The Cornerstone Research analysis suggests that Delaware’s courts are not in fact losing market share, at least with respect to deals meeting Cornerstone’s criteria.
Cornerstone Research’s analysis of this issue compares deals involving Delaware incorporated companies that were valued at greater than $500 million announced in 2007, on the one hand, to deals involving Delaware incorporated companies where the deal was valued at greater than $500 million and announced in 2010-2011, on the other hand.
The Cornerstone Research analysis shows that in terms of where the lawsuits were filed in the two respective periods, in 2007, 34% of the lawsuits were filed in Delaware, while in the 2010-2011 period, 41% of the lawsuits were filed in Delaware.
This analysis is reinforced when the lawsuits are looked at on a per deal basis. Looking at the venue of lawsuits in which acquisitions involving Delaware incorporated companies were being challenged, the Cornerstone data show that 29 of the 2007 deals involved at least one lawsuit filed in Delaware, and 32 of the deals involving only litigation outside Delaware. By comparison, in 2011, 41 of the deals had at least one lawsuit filed in Delaware, and just nine of the deals involved litigation only outside Delaware. In other words, in the later period, a much greater portion of the deals involved litigation in Delaware, either exclusively or in combination with litigation in other jurisdictions, and a much smaller proportion of the deals involved only litigation outside Delaware.
The Cornerstone Research data tend to corroborate many of the points I have made in recent posts on this blog – that is, M&A litigation is increasing, on both an absolute and relative basis; that a much higher percentage of deals is attracting merger objection litigation; and the average number of lawsuits per deal is also increasing. The Cornerstone Research analysis is particularly interesting with respect to the number of deals that are attracting unusually higher numbers of lawsuits.
The data in the Cornerstone Research report are directionally consistent with many other data sources I have cited in prior blog posts on this topic, but the Cornerstone figures appear to differ in certain specific details. For example, the Cornerstone Research analysis suggests that a much higher percentage of deals attract merger objection lawsuits than the figures in other reports have suggested (refer here, for example).
There likely are many explanations for the differences in the details between the Cornerstone Research data and other reports, but one particular aspect of the Cornerstone analysis should be kept in mind. That is, the Cornerstone Research analysis for the 2010 and 2011 period involves only M&A transactions with announced values greater than $100 million. Deals involving smaller valuations and the related litigation are not a part of the Cornerstone Research analysis. By the same token, Cornerstone Research’s historical analysis refers only to deals announced in the 2007 period with valuations greater than $500 million, which omits an even broader range of deals (and related litigation) based on the size of the deal valuations. These data set definitions could result, at a minimum, in differences between the Cornerstone Research data and other analyses of comparable time periods.
But in any event, the Cornerstone Research analysis makes a very important contribution to the consideration of these issues. The Cornerstone Research report clearly shows that M&A related litigation is becoming a more significant issue. With the increasing average numbers of lawsuits per deal, M&A-related litigation is becoming an increasingly more costly problem, as the increased numbers of lawsuits in multiple jurisdictions means both procedural complications and increased defense expense.
The Cornerstone Research analysis of the Delaware court “market share” issue could prove to be particularly interesting. The question whether or not litigants are self-selecting away from Delaware is and will be a very hot topic. The stakes are high, as the continued involvement of Delaware courts in corporate and securities litigation could determine whether or not Delaware’s courts continue to play a leading role on legal issues in these areas. And on a more practical level, if Delaware’s courts are not losing market share after all, there is no reason for its judges to be as concerned with attempting to curry favor with the plaintiffs’ bar in order to preserve market share.
The Cornerstone Research data certainly offers a variety of interesting statistical perspectives on the issues surrounding the growth of M&A litigation. We can all look forward to the forthcoming publication of Cornerstone Research’s complete report on these issues.
Very special thanks to Cornerstone Research for their willingness to share this data with me and with readers of this blog.