As the number of securities fraud lawsuits has declined (refer here), an alternative means that plaintiffs lawyers are finding to amuse and enrich themselves are lawsuits filed in connection with “going private” transactions. An April 24, 2007 National Law Journal article entitled “New Legal Battles Over Going Private” (here) takes a look at the court fights that “challenge the terms of a merger that would transform a public company into a private one.”
On the one hand, there is nothing new about litigation arising from M & A activity. There is a well-established tradition of plaintiffs’ lawyers using the courts to force companies that are being acquired to re-open the bidding process or bump up the proposed acquisition price – and also to earn themselves some fees. But as The D & O Diary has previously noted (here), these lawsuits in the “going private” context sometimes have additional elements that represent a variation on the established M & A litigation theme.
As the National Law Journal article discusses, plaintiffs’ lawyers frequently target certain aspects of going private transactions, including “deal sweeteners that enhance executives’ compensation.” Lawsuits also challenge deals because they “unfairly benefit specific corporate directors and executives” at shareholders’ expense. The lawsuits can lead to a reopened bidding process, a higher acquisition price, and even in some circumstances “damages to shareholders after the deal closes.”
The massive amounts of money involved in going private transactions create enormous opportunities for conflicts of interest to arise, particularly where incumbent management stands to benefit if a specific buyout group succeeds. These circumstances present a serious risk for claims against the directors and officers of the target companies. To see these factors at work within the context of a specific going private transaction, refer here to see my prior post regarding the Clear Channel Communications deal and lawsuit.
These kinds of lawsuits are expensive to defend because of the high stakes and time frames involved. The defense fees will usually be covered under the typical D & O policy, but in some instances settlements may not, in whole or in part. Some settlements or awards represent amounts (for example, for return of improper compensation) would be excluded under the typical amounts. Remedial steps, such as a reopened bidding process or a bumped up acquisition cost, would not in most instances represent covered loss. But to the extent awards or settlements are based on misrepresentations or other alleged malfeasance, the D & O policy could provide an important funding source for settlements and awards. Because of the complicated way that these kinds of claims intersect with the D & O policy, it could be particularly important for companies to enlist the assistance of a skilled D & O claims advocate in representing their interests in connection with the claim.
Another Subprime Lawsuit: One of the reasons I recently added a post (here) where I will maintain a running tally of subprime lending lawsuits is an intuition that as the consequences from deteriorating subprime mortgages ripple outwards, there will be more lawsuits against a broadening array of companies.
Along those lines, I updated the subprime lending lawsuit tally today to add a lawsuit that represents a new variant in the mix. According to news reports (here), Credit Suisse has been sued in connection with its bond securitization of subprime loans. Bankers Life Insurance Co. claims that it lost money on the investment grade bonds that Credit Suisse sold and that were backed by subprime mortgages. The lawsuit alleges, among other things, that the bank misled bond investors about how much protection they had against accelerated defaults. The lawsuit also accuses the bank of covering up delinquencies and attempting to maintain the illusion that the level of defaults were not serious.
We will undoubtedly be seeing more claims against a broader range of companies as the ripples from the subprime meltdown expand.
ABA Panel: On Friday May 4, 2007, I will be participating in an American Bar Association Tort Trial & Insurance Practice Section conference entitled “Beyond Legal: A Business Approach to Corporate Governance.” A copy of the conference brochure can be found here. I will be appearing on a panel entitled “D & O Insurance: Placing a Premium on Good Corporate Governance.” The panel will be moderated by my good friend Sean Fitzpatrick, and will include a number of distinguished speakers, including Professors Tom Baker of Connecticut Law School and Sean Griffith of Fordham Law School. If you will be attending the conference, I hope you will greet me and introduce yourself.