As 2009 has progressed, we have seen the return of significant public company mergers and acquisitions activity and, with it, shareholder litigation seeking to enjoin high value deals. So far in 2009, there have been nearly thirty $100M+ acquisitions of public companies headquartered in California. Approximately 90% of those deals have faced shareholder suits. In light of the recent uptick in mergers and acquisitions activity and the high level of litigation, we have surveyed acquisition-related litigation in the last nine months to search for trends. Below are some observations.
Shareholder Litigation of Deals Valued Above $100M
Among deals announced before August 31, 2009, plaintiffs have challenged twenty of twenty-two acquisitions (or 91% of deals) involving California-based corporations where the deal value exceeded $100M. These suits typically seek various forms of relief, although in most cases plaintiffs seek a preliminary injunction to enjoin the shareholder vote and prevent the parties from completing the deal. Suits to enjoin smaller transactions occur, but less frequently (21% of deals). As in past years, suits to enjoin the largest transactions, those valued at more than $1.0B, are always a near certainty (100% of deals).
Since August 31, four other acquisitions valued in excess of $100M have been announced, of which two have already resulted in litigation.
In the majority of situations, plaintiffs' lawyers elected to file suit in California state court, though a handful of suits have been filed in Delaware Chancery Court. Multiple complaints continue to be filed almost immediately, often in an effort by competing plaintiffs' firms to assume control of the litigation. Consistent with past years, the complaints ordinarily are pro forma and attempt to cover the full waterfront, challenging generically the process followed by the board, the existence of any "deal protection" devices in the merger documentation, and the nature of disclosures ultimately given to shareholders. Because the stocks of many companies are still trading below 52-week highs, plaintiffs also continue to argue that boards are selling at an inopportune time.
Fifteen shareholder litigations have resolved so far in 2009. Plaintiffs litigated two of these cases, as discussed below, and voluntarily dismissed three others after failing to move for a preliminary injunction before the shareholder vote. The remaining ten cases, or 67%, have settled. Plaintiffs generally have accepted equitable relief to the class in the form of additional disclosures about the merger. Although in our experience plaintiffs routinely ask for modifications to merger agreements – e.g., to reduce termination fees or to modify the terms of shopping provisions – such modifications occurred in only one of the cases surveyed, and even there the changes were modest.
Plaintiffs' attorneys' fees are of course the raison d'être of these cases and are often the most hotly-contested topic during settlement negotiations. In theory the fee should reflect in some measure the "benefit" purported to be conferred on the class by the settlement. But since as a real world matter there is often no material benefit, the negotiated fees tend to be highly situational, reflecting such factors as the size of the transaction, the plaintiff's perceived leverage in delaying or blocking the transaction, and, often, the plaintiffs' counsel's concern that a low fee, even in a totally spurious case, will reset the "market" for such arrangements. As a very rough rule of thumb, many cases appear to resolve with the defendants agreeing to pay the plaintiffs' counsel approximately 0.1% of the deal value. For instance, on deals valued between $100M and $1.0B, thus far in 2009 plaintiffs' attorneys have accepted between $300,000 and $700,000, or an average of $1,200 per million in deal value. As the deal value increases, the percentage recovery is ordinary smaller. In two 2009 cases involving deals valued above $1.0B, plaintiffs' attorneys received approximately $500 per million in deal value. While this sample size is small, these figures are nevertheless on par with the historical axiom that plaintiffs' attorneys often expect "a million for a billion" in deal value to settle a case.
Although most 2009 shareholder litigations have settled, which is typical, some defendants have refused to settle and have engaged in extensive motion practice. We are not aware of any 2009 acquisition that was enjoined by a court. In at least two large deals, both in Santa Clara County, plaintiffs failed to obtain a preliminary injunction enjoining deals from closing:
- In April 2009, plaintiffs' attorneys moved for a preliminary injunction to enjoin Gilead Sciences' $1.4B tender offer to CV Therapeutics shareholders. CV Therapeutics and Gilead actively opposed the motion, litigating issues concerning valuation analyses of the target and the acquiror's marketing strategies. On April 13, 2009, Judge Joseph H. Huber denied plaintiffs' injunction application, and the transaction closed. Plaintiffs subsequently dismissed the action without receiving any attorneys' fees.
- In July 2009, plaintiffs' attorneys sought a preliminary injunction from Judge Jack Komar to enjoin Sun Microsystems shareholders from voting on Oracle's $7.4B acquisition, arguing that Sun's disclosures about its valuation analysis were incomplete. Sun and Oracle actively litigated the injunction, and on July 14, 2009, the court denied plaintiffs' motion. Two days later, 62% of Sun shareholders voted to approve the merger. Plaintiffs later sought close to $800,000 in attorneys' fees on the theory that Sun had remedied some disclosures in response to the lawsuit. On September 18, 2009, Judge Komar refused to grant plaintiffs' counsel any fees.
Although the sample of litigated cases is relatively small, these litigations suggest that in appropriate situations, defendants can successfully litigate these matters to conclusion. Such a practice, while potentially more expensive in a given case than reaching an early settlement, may be particularly appropriate for companies that engage in acquisition activity regularly, and that wish to avoid the tax that this kind of case represents. It is not clear, though, that the plaintiffs' firm "industry" is dissuaded by such occasional setbacks.
A chart identifying the transactions and litigations described above can be found here.