Merger objection lawsuits are filed by disgruntled shareholders of companies that have been, or are about to be, acquired. They typically seek injunctive relief rather than monetary damages, but the plaintiff's attorney fees are typically included in settlements.
"Thus far these suits have not posed a significant challenge to directors and officers (D&O) insurers," Advisen says. "But the sheer volume of suits, plus the fact that a single M&A transaction can trigger suits in multiple jurisdictions, suggest they increasingly will have an impact on primary and first excess D&O underwriting and pricing.
"After drifting downward between 2001 and 2003, the number of suits filed per year increased from 18 in 2003 to 107 in 2006. "Following a one-year lull, the number of suits per year skyrocketed, reaching 335 in 2010," Advisen notes. Advisen cites the following reasons for the spike:
• The credit crisis/recession years of 2007-2009 were a buyer's market for acquirers with cash or access to scarce financing. Deals were often done at depressed prices relative to pre-recession valuations. Some distressed takeovers were essentially at fire sale prices. Throughout the spectrum of deals, buyers often were able to insist on highly favorable terms such as limiting the seller's available remedies in the event of a breach by the buyer. Not surprisingly, shareholders sometimes were dissatisfied with the outcomes.
• Plaintiff attorneys increasingly recognized that these suits represent a potentially lucrative new source of income. Companies often are willing to quickly settle suits that threaten to hold up a deal. Plaintiff attorneys collect about $500,000 per case on average, according to Advisen.
"A few merger objection suits have resulted in large monetary settlements, but most seek injunctive relief, with the only monetary component being the plaintiff¿s attorney fees," Advisen observes. "Many of these cases come to a quick resolution, keeping defense costs low, and therefore tend to be relatively inexpensive for D&O insurers."