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Saturday, April 30, 2005

"Which merger deals draw lawsuits?"

Lawyers, like everyone else, mazimize utility. In their case, mazimized utility often equates directly to maximized $$ (insert joke here). Overlawyered links to an article in Forbes magazine that asks the question "Which merger deals draw lawsuits?". The not so surprising answer is:

"The ones that are sure to generate big fees, of course." University of Arizona law professor Elliott Weiss and New York University economist Lawrence White studied lawsuits filed in Delaware Chancery Court over mergers of Delaware companies between 1999 and 2001. Of 564 mergers, 104 attracted lawsuits, and there was a pattern: the deals sued over "were among the largest, often involved all-cash offers and in more than half the cases the acquiring company owned stock in the firm it was buying." As it happens, "Delaware law subjects cash takeovers and buyouts by controlling shareholders to much tougher scrutiny than most stock-swap mergers" and in such deals acquirers frequently anticipate negotiations with independent directors, and thus enter a somewhat lower initial bid to leave scope for concessions. It is common, however, for the lawyers who sue to wait for the deal price to rise and then claim credit for having made that happen, thus entitling them to compensation: "according to the study, they sought and got fees averaging $1,800 an hour in the cases where the price rose." The authors "conclude that in many cases lawyers are 'exploiting their "license to litigate" primarily to enrich themselves.'" (Daniel Fisher, "Free Riders", Feb. 14).

The Weiss and White paper can be downloaded free from the SSRN here. Here's a few joice parts from the abstract:

...We offer two broad alternative hypotheses as to what drives merger-related class actions in Delaware: a "shareholder champion" hypothesis, and a "self-interested litigator" hypothesis...

...The pattern that we observe is redolent of a pattern of opportunistic filings, of a lawyer-driven process rather than a true client-driven process: systematic behavior with respect to which mergers were challenged; early and frequent complaints filed; a very high percentage of dismissed cases never reached a judgment on the merits; the absence of a single case that has been decided in favor of the plaintiffs on the merits; settlements tending to reflect free riding by plaintiffs' attorneys; plaintiffs' attorneys failing to challenge special negotiating committees' decisions or competing offers; attorneys with "real" clients and from outside the "traditional" Delaware plaintiffs' bar who were far more vigorous in their litigation efforts; no settlements overturned by the Delaware courts; plaintiffs' attorneys' fee awards in settlements usually paid by defendants and not out of common funds, and largely unchallenged; and plaintiffs' attorneys' fees representing a strikingly low percentage of claimed recoveries (but attractive on an hourly basis), which may well indicate that the attorneys added little value to the recoveries.
The paper's pretty substantal and dense, but worth a look.

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