Merger & Acquisition Litigation
Mergers and acquisitions may present conflicts of interest that cause directors and officers to breach their fiduciary duties to public shareholders. Because of the economic significance of such transactions and the fact that conflicts between insiders and public shareholders are exacerbated by the termination of the ongoing relationship – the so-called “final period” problem – latent conflicts that are tolerated in day-to-day management are closely scrutinized by courts in the context of mergers and acquisitions. The same issues are presented by other forms of transactions designed to transfer corporate ownership and control, such as tender offers and reverse stock splits.
Merger and acquisition cases typically involve intensive litigation prior to the closing of the transaction, oriented to uncovering process flaws that can be remedied through injunctive relief. Claims for damages based on an inadequate price are then litigated after closing. Individual claims demanding appraisal are also litigated post-closing, often in a consolidated action with class claims asserting breach of fiduciary duty. In the past year, substantial class damages recoveries were achieved in two litigations led by one of our partners.
We concentrate our M&A practice on cases where members of management face conflicts of interest that prevent them from acting in the best interests of shareholders. Conflicts of interest arise in a variety of circumstances, including the following:
Minority Squeeze-Outs. When a controlling shareholder seeks to acquire the shares held by the public, the controlling shareholder’s broad control over the company and its board of directors is recognized to present the inherent risk that shareholders will accept inadequate terms, based on the fear that the controlling shareholder might force a sale on worse terms or chose to operate the company to serve its own interests. Similar issues are presented by transactions in which controlling shareholders structure sales to provide themselves with benefits different from those received by the minority.
Management and Private Equity-Led Buy-Outs. Management’s interests also often conflict with public shareholders’ when they or an affiliated private equity firm conduct a buy-out. In such circumstances, the financial benefits obtained through accelerated payment of equity grants, other change-in-control payments, and the prospect of continued employment by the acquirer on better terms all provide strong incentives to accept less than full price in sale negotiations.
Management Entrenchment. Corporate managers’ interest in retaining their positions and status can also lead them to resist acquisition offers that would be in the best interests of public shareholders. In such situations, the board’s use of antitakeover devices, such as a “poison pill,” must be closely scrutinized.