Shareholder objections to mergers have become commonplace, requiring many companies to settle lawsuits for millions of dollars. Last October, Del Monte Foods agreed to settle such litigation for $89 million. This April, Delphi Financial Group agreed to a $49 million settlement.
Litigation can be effective in protecting shareholder interests in some deals, but questioning every deal seems to impose excessive costs on the companies involved and their shareholders. Shareholder plaintiffs now challenge virtually every large merger.
According to a study by Cornerstone Research and Robert M. Daines, companies that were sold for more than $100 million in 2010 and 2011 reported more than 1,500 lawsuits filed against them and the directors of the target companies. At least 91 percent of these mergers were challenged. This year, 175 lawsuits have been reported for 36 of the 40 deals announced from January to April.
The allegations in each case are similar—the shareholders of the target company were paid too little and did not receive enough information about the deal, and their boards did not adopt a good sale process.
Merger litigation intensified in the recent recession. Though deal activity slowed drastically in 2008 and 2009, more than 70 percent of large mergers in 2008 and more than 90 percent in 2009 were litigated. Merger activity recovered somewhat in 2010 and 2011, but plaintiff lawyers’ strategy of challenging almost every deal persisted. The same merger deal is subject to filings by many plaintiffs and in multiple courts. In 2011, any given deal faced an average of six lawsuits.
In an effort to avoid the extra cost of parallel litigation in multiple courts, some companies are changing their bylaws to mandate all shareholder litigation be brought in a court of their choosing.