On April 25, 2012, Cornerstone Research released a report written by Stanford Business School Professor Robert Daines and Cornerstone Research Principal Olga Koumrian entitled “Recent Developments in Shareholder Litigation Involving Mergers and Acquisitions – March 2012 Update” (here). This memorandum is the latest in a series of recent papers documenting the growth in merger related litigation in the United States. The research described in this paper is consistent with the prior reports but it also contains some new additional insights.
The report opens with a number of observations about the incidence of litigation in connection with mergers valued at $500 or greater during the period 2007 to 2001. The report shows that while in 2007 only about 53% of such deals attracted litigation, by 2011 almost all deals (96%) of those deals attracted litigation.
In addition, with respect to the deals of that size that attracted litigation during that period, the number of lawsuit per deal also increased between 2007 and 2011. Thus, while in 2007, the average number of lawsuits per litigated deal was 2.8, in 2011, the average number of lawsuits per litigated deal was 6.2 million. The report also shows that these trends were not limited just to the largest deals; during 2010 and 2011, for deals valued between $100 million and $500 million, 85% of the deals attracted litigation, and the average number of lawsuits per litigated deal was 4.1.
The absolute count of lawsuits involving deals with values of $500 million or greater also nearly doubled during that period, with 289 lawsuits filed in 2007 and 502 lawsuits filed in 2011.
The authors also note that as of March 2012, 67 lawsuits have already been reported for thirteen out of seventeen deals announced during January and February 2012.
Certain deals attracted far more than the average number of lawsuits. A table in the report shows that fifteen deals with a valuation of $100 million or greater during the period 2007-2011 attracted fifteen or more lawsuits. Interestingly, of these fifteen, twelve of these deals were announced in 2010 or 2012. The report notes that size alone does not explain which deals attracted these large numbers of suits, and that in fact several relatively small acquisitions attracted fifteen or more lawsuits.
The report also shows that deals in certain industries seem to attract the most numbers of lawsuits. Thus, deals in the energy industry attracted an average of 8.6 lawsuits per deal, and deals in the consumer goods industries attracted an average of 6.0 lawsuits per deal.
There is a common perception that there is a “race to file” these lawsuits after deals are announced. However, the report shows that while filings arrive quickly after deal announcements, the time to filing has not accelerated in any material way since 2007. Indeed, the proportion of lawsuits filed in the first week after the deal announcement declined from 55 percent in 2007 to 39 percent in 2011. In all years studied, “a significant percentage of lawsuits were filed more than four weeks after a deal’s announcement.”
One phenomenon that has been the subject of discussion with respect to this type of litigation is whether or not there has been a “flight from Delaware” as claimants seek to pursue claims in the courts of other states. This study shows that with respect to merger litigation involving Delaware corporations, the share of M&A lawsuits filed in Delaware was higher in 2011 (45%) than in 2007 (34%) and that the percentage has increased steadily since 2008. However, according to the report, the “most striking trend in venue choice” is that challenges to the same deal in both Delaware and some other venue (as opposed to just Delaware alone or to some other venue alone) are now more common than in 2007. Most lawsuits brought in non-Delaware courts were filed in California, Texas and New York, “likely reflecting where many deal targets are headquartered.”
The report shows that M&A shareholder lawsuits “typically settle and often settle quickly.” Of the 2010 and 2011 lawsuits where the authors were able to track the resolution, 28 percent were voluntarily dismissed, four percent were dismissed by the court, and 67 percent settled. This represents a “significant change in outcomes observed a decade ago.” A prior study cited in the report shows that in 1999 and 200, 59 percent of cases were dismissed and only 28 percent settled. Of the 202 unique settlements involving 2010 and 2011 deals, 194 were reached before the merger closed. The median time between lawsuit filing and settlement was forty-four days.
Settlement terms have also changed over time. Whereas during 1999 and 2000, the majority of settlements (52%) involved cash awards and only 10% involved additional disclosures only, only 5% of 2010 and 2011 lawsuits related to M&A deals involved cash payments, and a large majority (83%) involved additional disclosure only settlements.
The average fee awards in connection with the M&A suits in 2010 and 2011 in connection with deals valued at $500 million or greater was $1.2 million. However, this average was pulled upward by some larger awards. Only 23% of plaintiff fee awards were $1 million or higher, while 44 percent were at or under $500,000 or under. Of the largest plaintiffs few awards, several were associated with settlements that did not involve any payment to shareholders. Average fees per deal fluctuated between 2007 and 2011, and while the average fees as a percentage of deal value in 2010 and 2011 remained higher that in 2007, the average fees as a percentage of deal value declined in 2010 and 2011 compared to 2009.
The analysis in the Cornerstone Research report corroborates many of the observations noted in prior analyses of these same topics. That is, M&A related litigation is becoming increasingly more prevalent, and each deal is attracting an increasing number of lawsuits. At a minimum, the Cornerstone Report helps explain why M&A related litigation has become increasingly more expensive to defend. The impact of M&A litigation settlements and of plaintiffs’ fee awards on the cost of this litigation is less clear, but overall the implication is that the growing frequency of this type of litigation remains a very significant corporate and securities litigation trend, with important implications for D&O insurers.
One very important consideration to be kept in mind when comparing the various reports regarding M&A litigation is that each of the reports has used its own deal size definition to define the merger transactions that are the basis of each report’s analysis. The definitions used in the various reports are not necessarily consistent. At a minimum, the differences in the definitions used can make comparisons between the reports challenging. In any event, it is important in considering the analysis in any one of the reports to keep clearly in mind what definitions the report has used in determining what merger transactions to include the study.
The FDIC’s Latest Failed Bank Lawsuit: On April 20, 2012, the FDIC filed its latest failed bank lawsuits against ten former directors and officers of the failed First Bank of Beverly Hills. In its complaint (here), which the FDIC filed in its capacity as receiver for the failed bank, the FDIC seeks to recover losses of at least $100.6 million the bank allegedly suffered on nine poorly underwritten acquisition, development and construction loans and commercial real estate loans from March 2006 through July 2007.
The bank failed on April 24, 2009, or just short of three years prior to the date the FDIC filed its lawsuit. The complaint asserts claims against the ten defendants for negligence, gross negligence and breach of fiduciary duties. The complaint alleges that the defendants approved or allowed the loans in question in willful disregard of the bank’s own loan policies and with “willful blindness” to the risks and imprudence of the loan decisions. The complaint alleges that at the same time the defendants were approving these risky strategies, they were “weakening the Bank’s capital position by approving large quarterly dividend payments to the Bank’s parent company,” of which several defendants were shareholders. The complaint alleges that the individual defendants “lined their own pockets” with these dividends.
The FDIC’s lawsuit against the former directors and officers of the First Bank of Beverly Hills is the 29th the FDIC has filed as part of the current wave of failed bank litigation, and the fifth so far involving a failed California bank. In its latest website update, the FDIC announced that as of April 25, 2012, the agency has authorized lawsuits in connection with 58 failed institutions against 493 individuals for D&O liability, inclusive of the 29 filed D&O lawsuits naming 239 former directors and officers. Given the large number of failed banks like the First Bank of Beverly Hills approaching the third anniversary of their closure, it seems likely that we will be seeing a flurry of new FDIC failed bank lawsuits in the months ahead.
In the meanwhile, the FDIC continues to take control of additional failed banks. This past Friday evening, the FDIC closed five additional banks, the most the FDIC has closed in a single day this year. These additional closures bring the 2012 year to date number of bank closures to 22. This flurry of bank closures is a little bit surprising as up to this point, the pace of closures had begun to suggest that the FDIC was winding down its new bank closures. The five closures on Friday night suggest that there may still be a number of bank failures yet to come.
For Almost As Long As Our Country Has Existed, Man Has Dreamed of Traveling to Cleveland: NASA announces its plan to put a man on a bus to Cleveland. Get the details here.