As I have frequently noted on this blog (most recently here), one of the most distinctive litigation phenomenon has been the rise in litigation involving M&A activity. It has gotten to the point that virtually every merger now also involves a lawsuit (or, more often, multiple suits). These cases have proven attractive to plaintiffs’ lawyers because the pressure to close the deal has allowed the claimants to attract a quick settlement, often involving an agreement to publish additional disclosures or adopt corporate therapeutics and the payment of plaintiffs’ attorneys’ fees.
However, as noted in a November 9, 2012 post on the Harvard Law School Forum on Corporate Governance and Financial Reform by Boris Feldman of the Wilson Sonsini law firm, there recently has been a new twist to the M&A litigation phenomenon; increasingly, plaintiffs’ lawyers have “refined their business model” and now they aim to “keep the litigation alive post-close.” Moreover, Feldman notes, the plaintiffs are pursing these post-close M&A cases “even in situations where objective factors suggest a lack of merit to the claims: e.g., high premium; no contesting bidders; overwhelming shareholder approval; customary deal terms.”
Feldman posits three reasons that plaintiffs’ attorneys are pursuing these post-close merger claims. First, due to changes in the plaintiffs’ bar, some lawyers are struggling to modify their business model, as a result of which some lawyers have “decided to pursue cases that they would have let run dry in the past.”
Second, Feldman acknowledges that the post-close cases have their own in terrorem value, even if it is only a form of “nuisance value.” The continuing case subjects corporate executives to time-consuming and burdensome discovery, sometimes in the context of a deal that may or may not have worked out all that well. The case also threatens a trial on processes and analysis that led to the acquisition, a form of exposure the company may prefer to avoid. Therefore, Feldman notes, “even post-close suits have some ‘go away’ value to the surviving company.”
Third, Feldman speculates that at least some of the plaintiffs’ attorneys may be pursuing a longer term strategy, by showing that they are willing to persevere for years, even in a weak case, in the hope that the defendants “may just say ‘pay them and get rid of it’ before the deal closes.” By these lights, “a plaintiffs’ lawyer rationally could pursue a frivolous case, at great expense, post-close, even with low odds of getting a recovery, “simply as a way to improve the profitability of the rest of his inventory.”
Feldman notes that the post-close merger cases have their own peculiar dynamic, different than the dynamic of cases pre-close. Among other things, post-close, the plaintiffs’ lawyers have an incentive to try to drag things out. Pre-close, the plaintiffs’ lawyers want to accelerate procedures and discovery, to keep the pressure on the parties to the underlying transaction to settle the case. Post-close, the plaintiffs want to keep the case as long as they can, in part on the hope that as time goes by they might manage to find documents or other materials or information that will support their case, and in part on the hope that as time goes by, the defendants will get weary of the case and pay to make it go away.
According to Feldman, defendants in these post-close cases may want to take a more active role, and in particular actively push toward summary judgment. He suggests that though courts have been reluctant to grant summary judgment in the past, judges will “eventually decide that most merger claims are strikesuits and will extirpate them before trial.”
As support for this contention that more courts may be willing to grant summary judgment in post-close cases, Feldman cites the recent grant of summary judgment in favor of Intel in the case arising out of Intel’s acquisition of McAfee. (In a November 2, 2012 order (here), California Superior Court Judge James P. Kleinberg granted the defendants’ motion to dismiss in the case, just two weeks prior to the scheduled trial date.)
With reference to the grant of summary judgment in the Intel case, Feldman argues that the plaintiffs’ Achilles Heel in the cases may be the exculpatory provisions in the Delaware Corporations Code, which preclude damage claims against directors for breaches of fiduciary duty unless plaintiffs can establish serious conflicts of interest or bad faith. Feldman contends that “it will be the rare case indeed where plaintiffs have such evidence against a director, much less a majority of the Board.” Feldman predicts that many more courts will be willing to jettison cases at the summary judgment stage on this basis.
Finally, Feldman notes that even if these cases survive summary judgment, they could prove difficult for the plaintiffs. The cases are challenging to try to settle, as there are no opportunities for non-monetary settlements and as the justification for additional deal consideration will be lacking after shareholder approval. At the same time, the cases will prove difficult for plaintiffs to try, as, Feldman suggests, “very few judges will be willing to second-guess the decisions of independent, well-advised boards of directors as to what their company was worth.” In the final analysis, Feldman suggests, the “ultimate irony” may be that even if plaintiffs’ keep their cases alive post-merger, they will have difficulty figuring out “a way to monetize them that survives judicial scrutiny.”
I think Feldman’s analysis is interesting, particularly his estimation of the strong likelihood that defendants will prevail if they push the post-close merger cases to summary judgment or trial. At the same time, however, I think it is important to note that Intel’s summary judgment victory was considered noteworthy precisely because it was so unusual for the defendant company to continue to fight the continuing litigation. (See for example, Nate Raymond’s commentary about the summary judgment ruling on the On the Case blog, here.)
Even if Feldman is right about the defendants’ prospects if they continue to fight these cases, the far likelier outcome is that the defendant companies will, as the plaintiffs’ undoubtedly hope, tire of the cases rather than fighting them and seek some type of a compromise. Unfortunately, the plaintiffs’ may continue to pursue post-close merger cases as a way to try to extract something from the merger, even if they are unable to secure a pre-close settlement, simply because the likeliest outcome is that they will eventually get rewarded for doing so. Whether more companies will, like Intel, prove willing to fight the cases remains to be seen.
Rating Agencies Take Another Hit: In a post last week, I noted the decision of an Australian Court holding S&P liable for ratings of certain complex financial instruments. The rating agencies took another hit later in the week, in a decision by an Illinois state court judge denying the motion of McGraw-Hill, S&P’s parent, to dismiss an action brought against the rating agency by the Illinois attorney general. The court’s ruling that the alleged misrepresentations are not protected opinion is particularly noteworthy.
Illinois Attorney General Lisa Madigan had commenced the action, alleging that during the period 2001 through 2008, S&P had misled the investing public by claiming that its ratings of certain structured financial products were independent, objective and unbiased. The AG alleged that the rating agency’s repeated representations regarding its independence and objectivity were demonstrably false. The Illinois AG asserted claims under the Illinois Consumer Fraud and Deceptive Business Practices Act and under the Uniform Deceptive Trade Practices Act. The defendants moved to dismiss.
In her November 7, 2012 opinion (here), Illinois (Cook County) Circuit Court Judge Mary Ann Mason denied the defendants’ motion to dismiss. Her opinion emphasized certain alleged attributes of the ratings themselves. That is, first, that because of the alleged “opaque” nature of the securities (meaning that there was no ready source of information by which investors could otherwise gauge the investments), the rating agency’s assertion that its ratings were independent, objective and unbiased were “of enhanced importance to investors.” Second, because the opinions allegedly were issued pursuant to an “issuer pays” business model, as a part of which the rating agency’s had an incentive to provide the rating the issuer desired in order to secure future business, “allowed the profit motive to override its objectivity and independence.”
The defendants moved to dismiss on the ground that its ratings represent protected opinion. However, as Judge Mason noted, the AG’s claims are not based on the rating agency’s opinions but rather its “repeated statements of fact regarding S&P’s independence and objectivity.” Judge Mason expressly rejected the defendants’ arguments that the ratings were protected by the first amendment, because the statements about the agency’s objectivity and independence and not simply opinions; that are, Judge Mason said, “verifiable representations regarding the manner in which S&P assures the integrity and independence central to the credibility of its ratings.”
Judge Mason went on to note that “the logical extension “ of the defendants’ arguments “would be to immunize rating agencies from investor claims based on investor claims clearly intended to influence those same investors.” She noted that the entire value of the system from which the rating agencies hope to profit “depends on the investing public’s confidence in the credibility and independence of its ratings.” If the investors lack that confidence, the “ratings lose their value to issuers and issuers lack motivation to seek out the agency’s ratings in the future.”
Judge Mason’s ruling is interesting and her reasoning could be persuasive to other courts, at least in other cases in which the misrepresentation that rating agency defendants are alleged to have made relate to the agencies’ supposed independence and objectivity. However, as Alison Frankel notes in an interesting November 9, 2012 post on her On the Case blog (here), Judge Mason’s ruling may not open the floodgates; in particular, as Frankel notes, federal laws may preempt claims against rating agencies involving post-2007 conduct. It could be that Judge Mason’s reasoning is less useful in cases involving alleged misrepresentations after 2007, and the pre-2007 alleged misrepresentations may be untimely.
Libor Investigations in Asia: In earlier posts (refer, for example, here), I have examined the regulatory investigations into possible manipulation of the Libor benchmark interest rates. A number of countries are also investigating possible Libor manipulation, including countries in Asia. As detailed in an interesting November 2012 memorandum from the Ince & Co. law firm entitled “LIBOR – The Asia Story” (here), the Asian countries investigating possible Libor or other benchmark interest rate manipulation include Singapore, Korea, and Japan. Interestingly, the related developments in Singapore include a lawsuit brought by an RBS trader who claims he was wrongfully terminated for his involvement in benchmark rate manipulation in order to deflect attention from the bank for its involvement in the Libor scandal.