The number of M&A deals declined last year. Yet shareholder suits continued to challenge most transactions. The number of suits filed in 2012 declined to 602 from 742 in 2011 and 792 in 2010. The percentage of deal announcements followed by a shareholder complaint, however, remained constant. Approximately 93% of deals valued over $100 million were challenged, according to a recent Report issued by Cornerstone Research (here). About the same percentage of deals were challenged in 2001 while 90% and 86% were subject to a shareholder lawsuit in 2010 and 2009, respectively. A slightly larger percentage of deals valued over $500 million were challenged. About 96% of those transactions drew a shareholder complaint. On average suit was filed 14 days after the announcement, although in some instances the complaint was lodged within hours.
The majority of shareholder suits filed in 2012 for which Cornerstone was able to obtain data (about 58%) were settled for deals over $100 million. The 64% settled last year, slightly more than the prior two years when 58% and 62% settled. About 34% of the cases were voluntarily dismissed in 2012 which is the same percentage as in 2011 and about the same as the 32% in 2010.
In 2012 most suits were resolved with an agreement to make additional disclosures. 81% of the M&A related suits filed last year settled on this basis. Only one 2012 settlement had a monetary component. Those numbers are comparable to the two preceding years. In 2011 86% of the suits settled with additional disclosures while 4 involved a monetary component. In 2010 76% of the cases settled with additional disclosures and 8 had a monetary component.
Two of the largest settlements in recent years for shareholder suits were in 2012. One was the El Paso Corporation/Kinder Morgan Inc. deal which resolve for $110 million. The other was the Delphi Financial Group, Inc. – Tokio Marine Holdings, Inc. transaction which settled for $49 million. Both deals were announced in 2011. The largest settlement from 2003 to 2012, according to the Report, was the August 2010 resolution of the Kinder Morgan managed buyout for $200 million with $24.1 million in attorney fees and expenses. The smallest settlement on the top fifteen list was for the eMachines management buyout in April 2007 for $24 million and $7.2 million in attorney fees and expenses.
Noteworthy is the fact that all but two of the settlements of shareholder suits in the top fifteen involved allegations of significant conflicts of interest such as:
- The target companies’ management negotiated premiums for share classes they held;
- The target companies’ CEOs negotiated side deals with acquirers to purchase some of the targets’ assets;
- Majority shareholders obtained ownership of the remaining shares on what were claimed to be unfair terms;
- The target companies’ financial advisers had conflicts of interest; or
- The deal was a management-led buyout.
Finally, the number of shareholder suits challenging the annual proxies spiked in 2012 to 12, doubling the filings from 2011. In 2010 only 4 such suits were filed. Claims focused on say on pay were typically not successful, according to Cornerstone, while those which involved the dilution of existing shareholders appeared to gain more traction. All of the 2012 cases were filed by one law firm. In early 2013, however, two additional firms have announced investigations on these types of claims.