As most readers are aware, litigation involving objection to mergers and acquisitions transactions has been proliferating in recent years, to the point that virtually every deal draws at least one lawsuit. While many of these actions are nuisance lawsuits, they are not without their costs. Indeed, according to one recent study, the costs to defend and settle these suits are growing.
As reported in a July 10, 2018 press release from Chubb (here), the average total cost associated with a settled merger-objection lawsuit increased 63% in the four year period between 2012 and 2016. The total cost includes attorneys’ fees and cash settlement amounts. In 2012, this figure was $2.8 million. By 2016, the figure had grown to $4.5 million. The average amount for the four year period from 2012 to 2016 was $3.6 million. Of these costs, only about 39% represented amounts going to shareholders. 61% of these amounts went to plaintiffs’ and defense attorneys in the form of fees and expenses.
For merger objection lawsuits that were dismissed rather than settled, the percentage increases over the four year period are even greater. In the four year period between 2012 and 2016, the average total cost increased 162%, from $880,000 in 2012 to $2.3 million in 2016. The average total cost associated with dismissed merger objection lawsuits during the period 2012 to 2016 was about $912,000.
The information in Chubb’s press release was compiled in association with the June conference Chubb sponsored entitled “From Nuisance to Menace: The Rising Tide of Securities Class Action Litigation,” information about which (including a video replay of the event) can be found here.
These costs operate as a sort of a deal tax, adding expense to the overall costs of M&A transactions. To be sure, many of these costs are picked up by the target company’s D&O insurer. However, in recent years, the insurers have increased the retentions associated with M&A-related lawsuits, usually to $1 million or more, which results in a shifting of a large portion of these costs back to the insured companies. Taken collectively, these costs represent an enormous expense imposed on doing business in this country. Taken collectively, the costs also add a huge load to the D&O insurers’ aggregate loss costs. The costs associated with this type of litigation are among the reasons that D&O insurers’ underwriting results have deteriorated in recent years.
At least some courts have shown their disdain for these kinds of lawsuits. In a series of decisions culminating with the Trulia ruling in January 2016, Delaware’s courts showed their unwillingness to simply OK the disclosure-only settlements that typically characterize the resolution of these lawsuits. In August 2016, Judge Richard Posner of the U.S. Court of Appeals for the Seventh Circuit wrote a scathing opinion critical of disclosure-only settlement in the Walgreen’s case. The net effect of these rulings is not that fewer cases have been filed, but rather that the cases have been filed elsewhere other than Delaware state court and the Seventh Circuit. While observers have held out hope that other courts might follow Delaware’s and Judge Posner’s lead, other courts (for example, New York’s) have proven to be less disdainful of disclosure-only suits (as discussed here).
As a result, the merger objection lawsuits continue to be filed. By my count, of the 204 securities class action lawsuits filed in the first six months of 2018, 83 (or about 40.6%) were merger objection lawsuits. Given the figures that Chubb reported for the growing average costs associated with this type of litigation, these lawsuits represent a significant financial burden on the defendant companies and on their D&O insurers.