Minimize risks of M&A litigationAugust 2013 By Lisa A. Lori, Esq.
In today's current business climate, mergers and acquisitions are often the pinnacle of a CEO's success. I, personally, would be delighted to sell my firm for a hefty fee and retire. Mergers and acquisitions (commonly called M&As) are on the rise. In the promotional products industry alone, I counted at least four notable M&As that took place in July 2013. August barely started, and another M&A was announced—Standard Register acquired top 50 distributor WorkflowOne in a transaction valued at $218 million.
The number of M&As will continue to increase, along with the amount of lawsuits that accompany them. To provide some perspective, in 2012, litigation was brought 92 percent of the time in transactions involving more than $100 million.* In fact, the average transaction resulted in five different lawsuits.† As an example, earlier this year, Dell announced that it would be subject to a buyout. In light of that proposed transaction, 24 lawsuits were filed.
Dell is an example of pre-acquisition litigation, where investors or others sue to stop a transaction from happening (or, in lieu thereof, to obtain a monetary payout in exchange for not contesting or trying to stop the deal from closing). Substantial litigation also occurs after acquisitions occur, where one party to the transaction sues after the deal closes and seeks money damages. Post-acquisition litigation involves claims where, for instance, a buyer sues the seller for making misrepresentations concerning the business that was being acquired, or a key employee or executive of the selling company violates a restrictive covenant with the buyer.
Pre-acquisition litigation cases are attractive to plaintiffs' lawyers because they present significant settlement leverage—defendants are typically under pressure to close the deal quickly. Increasingly, however, plaintiffs' lawyers are keeping pre-acquisition litigation alive after the deal closes by, among other things, limiting their claims to money damages.
While it is impossible to guarantee a litigation-proof deal, here are a few basics to keep in mind:
Make Sure the Deal Structure is Right for You
Deals can be structured in three ways: a stock purchase (where the acquiring company purchases some or all of the shares of another company from its shareholders), an asset sale (where one company purchases all or substantially all of the assets of another company), or a merger (where one company combines with another company). Since the acquiring company and selling company have conflicting interests (the selling company wants to get as much money as possible for the company, and the buying company wants to pay as little as possible for it), it is important that each company have its own legal counsel in the transaction.