The D & O Diary
Takeover Litigation in 2012
Litigation related to M&A activity continued at an “extremely high rate” in 2012, according to the latest research update from Ohio State law professor Steven Davidoff and Notre Dame business professor Matthew Cain. According to the professors’ analysis, presented in their February 1, 2013 paper entitled “Takeover Litigation in 2012” (here), 91.7% of all merger transactions that met the professors’ criteria attracted at least one lawsuit, compared to 91.4% in 2011.
The professors’ paper is the latest update on their research originally presented in their January 2012 article entitled “A Great Game: The Dynamics of State Competition and Litigation” (here), which I reviewed here. Following the original article’s publication, the professors updated their research with additional litigation data regarding M&A transactions that took place in 2011. Their latest paper updates their research with regard to 2012 transactions.
The professors have limited their analysis to merger transactions over $100 million involving publicly traded target companies with an offering price of at least $5 per share. The 2012 update includes only transactions there were completed as of January 2013. The professors intend to update their 2012 data in six months to incorporate information relating to the in process transactions.
It is probably worth noting that there were fewer deals that met the professors’ sorting criteria in 2012. There were only 84 deals with the defined characteristics in 2012, compared to 128 in 2011 (representing a year over year drop of 34%). But the percentage of deals attracting at least one lawsuit remained virtually unchanged, with 91.7% of deals attracting at least one suit, compared to 91.4%. The professors believe based on anecdotal evidence, that when they update their 2012 “the ultimate litigation rate will match or exceed the 91.7% figure.” Though the litigation rate is virtually unchanged from 2011, the 2012 rate is “almost 2.5% that of 2005,” when the litigation rate was only 39.3%.
The number of complaints brought per transaction remained at about 5.0 lawsuits per transaction, the same rate as in 2011 but more than double the mean number of lawsuits in 2005, when the figure was 2.2/ Multi-jurisdiction litigation “remained similar in 2012 with 50.6% of transactions with litigation experiencing litigation in multiple states,” compared to 53% in 2011.
87.5% of all 2012 cases that had settled involved “disclosure only” settlements, compared to 79.5% in 2011. The average attorneys’ fees were down substantially in 2012, but that may be driven by a few larger settlements in 2011. The median attorneys’ fee award was about the same both years -- $580,000 in 2011, $595,000 in 2012.
Delaware attracted a slightly reduced share of M&A litigation in 2012. The state attracted 46.7% of all litigation that could have been filed in there in 2012, compared with 52.8% in 2011. Delaware “also appears to be dismissing fewer cases, thus allowing more cases to be settled” – 76.9% of Delaware cases settled in 2012, compared with 61.5% in 2008. The authors note, referencing their original paper, that “when Delaware loses cases to other jurisdictions it historically has dismissed fewer cases and allowed more to settle, consistent with conduct designed to reattract litigation.”
Because of the authors’ sorting criteria, their analysis and conclusion are most relevant to the larger transactions. However, based on my own observations, the authors’ conclusions are consistent even with respect to the smaller deals that do not meet their sorting criteria. The explosion of M&A-related litigation in recent years has not been limited just to the larger companies and transactions.
The surge in M&A related litigation in recent years has been one of the principal justifications the D&O insurance carriers have given as an explanation for their efforts to try to increase the insurance rates, particularly with respect to the rates for primary D&O insurance. In addition, the upsurge in M&A-related litigation has also affected the terms and conditions that the carriers are willing to offer. In particular, some carriers have been insisting on adding a separate, larger retention for M&A-related claims. The professors’ updated M&A-related litigation date seems to suggest that the carriers will try to continue to push rate and to try to include separate M&A-related claim retentions.
As I detailed in a prior post (here), the defense expenses and settlement amounts associated with M&A-related litigation represent a serious problem, for the companies involved and for their insurers. The prevalence of the multi-jurisdiction litigation is a particularly vexing problem, as the proliferating lawsuits are expensive to defend and difficult to resolve. Unfortunately, based on the professor’s updated research, all signs are that these phenomena will remain a significant part of the corporate and securities litigation landscape for the foreseeable future.
Special thanks to Professor Davidoff for providing me with a copy of his latest paper.
Chinese Reverse Merger Cases: Is There a “China Discount”?: During 2010 and 2011, and to a lesser extent during 2012, the plaintiffs’ securities lawyers rushed to file securities class action lawsuits against Chinese companies that had obtained a U.S. listing through a reverse merger. But while these cases flooded the courts, they have not proven to be a huge bonanza for the plaintiffs’ lawyers or their clients. As I noted in a prior post, the settlement so far have been rather modest.
Michael Goldhaber’s February 12, 2012 Am Law Litigation Daily article entitle “Whither Chinese Reverse Merger Litigation?” (here) suggests that there may be a “China discount” in the Chinese reverse merger cases. The article quotes a defense attorney with the Sherman & Sterling law firm as saying that there is now a “critical mass of settlements between $2 million and $3 million” and that these lower settlements “may exert a gravitational pull on other settlements down the road.” The article notes that “the remarkable uniformity of the settlements suggests that $5 million D&O insurance policies are standard for this niche,” adding that a policy of that amount allows enough for defense fees and a settlement compromise with in the policy limit.
The two arguable exceptions to these generalizations both involve proceedings outside the U.S. The first is the $77.5 million Hong Kong arbitration award that C.V. Starr obtained against the founding shareholders of China MediaExpress Holdings (about which refer here) and E&Y’s $118 million December 2012 settlement of a Canadian class action arising out of its audit of Sino-Forest Corporation (refer here). Though these two exceptions each have their own distinct characteristics, these developments may hearten the claimants in the other cases and give them the incentive to continue to try to press on. The evidence so far, however, suggests the greater likelihood of the more modest settlements that have tended to become the norm.
A particularly interesting feature of the Am Law Litigation Daily article is a link to Sherman & Sterling document provided a comprehensive status summary of more than 75 disputes in U.S. forums relating to allegations of securities violations by Chinese parties, including more than 50 reverse merger companies. The summary document can be found here.
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