The plaintiff-side M&A bar is notoriously creative in discovering new avenues to challenge transactions. The approach de jeur is to file a lawsuit seeking to enjoin the shareholder vote on an acquisition for insufficient disclosure, and then settle the suit when the company agrees to make additional disclosures and pay plaintiffs' attorneys a "reasonable fee." This type of litigation is tantamount to corporate extortion – the claims are often meritless, but corporations do not want to risk disrupting their transaction by challenging the plaintiff in court. These lawsuits are frustrating but avoidable. Below is an overview of the litigation in this area and how you can draft your disclosures to minimize the likelihood of becoming a target.
How These Lawsuits Work
When a company announces an acquisition, a plaintiff's firm will review the disclosures and try to identify any relevant information the company has omitted. The firm will then file a lawsuit against the company and its board of directors, claiming the disclosures are inadequate to allow investors to make informed decisions on the acquisition. These claims come in various forms – chiefly as breach of the duty of candor and violations of Section 14(a) of the Securities Exchange Act of 1934. The plaintiff will ask the court to enjoin a vote on the transaction unless the company provides the additional information.
Common Omissions Identified
Most of the disclosures at issue in these suits fall within two categories: information related to the seller's financial advisor's fairness opinion, and disclosure of conflicts of interest. Plaintiffs regularly argue that shareholders require more detail regarding the fairness opinion to make an informed decision. This detail includes the projections underlying the opinion, fees paid to the financial advisor, and the methodology for valuing the business or certain assets. With regard to conflicts of interest, companies are targeted for failing to disclose affiliations between the target's board and the buyer; promises of employment or board positions to current board members; and conflicts between the company, the board and the financial advisor.
How Cases Are Resolved
With the acquisition at risk, companies are in a difficult position. If they fight the preliminary injunction or move to dismiss the complaint, they risk delaying the acquisition as the court makes its decision. Plaintiffs' lawyers offer an alternative: If the company makes the supplemental disclosures and pays the lawyers' fees, the plaintiff will ‒ on behalf of all shareholders ‒ dismiss the suit and release the company and the board from any liability arising from the acquisition. Weighing these two options, most companies determine it makes more financial sense to settle the case. Some courts, particularly in Delaware, have been questioning the value of these suits to shareholders and refusing to approve plaintiffs' counsel's fee awards except in cases featuring clear omissions of obviously material information. Unfortunately, the pushback has not yet been strong enough to deter these suits altogether. Instead, plaintiffs' firms are filing more complaints outside of Delaware, with California, New York and North Carolina becoming popular venues.
How to Draft to Avoid
Though these lawsuits are common, not all acquisitions prompt a disclosure-only lawsuit. The primary difference between transactions that are targeted and those that are not is the nature of the disclosures. Plaintiffs' lawyers want sure things, which is why they focus their lawsuits on information that courts generally agree is important to shareholders: financial information and conflicts of interest. Companies and directors can reduce their exposure by providing more comprehensive disclosures of information in these two areas. While no two situations are identical, and it can be difficult to reconcile some of the decisions in this area, practitioners can find substantial guidance in the case law on how to address these matters in a manner that will discourage ill-founded claims.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
