Along with a recent flurry of activity in the mergers and acquisitions market, law firms serving this sector have witnessed an uptick in lawsuits seeking to enjoin these transactions. Companies undertaking new corporate compositions have come to realize that these shareholder lawsuits are a cost of being a player in the mergers and acquisitions market.
Things usually proceed along these lines:
(1) Company A announces that it has entered into an agreement to acquire Company B;
(2) Within days of the announcement, attorneys for a shareholder of Company B file a lawsuit, naming Company B and its board of directors as defendants;
(3) Shortly after the filing, the shareholder asks the court to enjoin the transaction, declaring that the process which resulted in the deal and the price being offered to the shareholder, are both unfair; and
(4) In order to ensure that the transaction closes by the effective date, Company B (and its board) seek an early dismissal of the lawsuit or reach a settlement with the shareholder.
A number of companies and courts view this type of litigation as a nuisance. Recently courts have commented negatively on these inevitable “strike suits.” In TCW Technology Ltd. P’ship v. Intermedia Comm’ns, Inc., Judge William B. Chandler of the Delaware Chancery Court noted that, “[t]oo often judges of this Court face complaints filed hastily, minutes or hours after a transaction is announced, based on snippets from the print or electronic media. Such pleadings are remarkable, but only because of the speed with which they are filed in reaction to an announced transaction.”
A high-profile deal valued at $3.15 billion, between Continental and United Airlines, provides a case in point. Not surprisingly, only hours after the merger was announced on May 3, 2010, a shareholder of Continental filed a lawsuit against Continental, United and the members of Continental’s board of directors. The shareholder is seeking to prevent the companies from going forward with the proposed merger, arguing that, by agreeing to merge with United, Continental’s board members violated its duties to its shareholders.
Having served as counsel to several companies and boards involved in litigation arising from mergers, I can tell you that shareholders have an uphill battle when it comes to actually obtaining an injunction. The advantage that the shareholder possesses, however, is that companies that put forth the amount of work and effort it takes to complete a multi-million dollar transaction, demand certainty.
Litigation is far from certain. If a dismissal is not obtained early, what typically happens is that the parties simply “buy off” the shareholder and her counsel. It goes down as nothing more than a line item on the closing statement.
Brandon Williams is a corporate litigator specializing in mergers and acquisitions. He is a partner at Alston & Bird, LLP in Atlanta. Contact him at firstname.lastname@example.org.