Volatility in the world of shareholder class actions has stoked a debate over whether the lawyers who bring such cases are laudable public watchdogs or stick-up artists.
The number of federal securities class actions rose by 14 to 166 in 2013, according to Cornerstone Research, but remained below the historic average of 191 filings from 1997 to 2012. Securities class action settlements, however, saw a huge rise in 2013. According to Cornerstone, at $4.8 billion total settlement dollars hit their highest level since 2007.
Shareholders remain particularly active
in challenging mergers and acquisitions. Cornerstone found that lawsuits were filed in 90 percent or more of M&A deals for
the fourth consecutive year. According to Cornerstone’s research, M&A deals were subjected to an average of more than five lawsuits each in 2013. Litigation was resolved before deal closing 75 percent of the time, usually by settlement. None of the lawsuits in Cornerstone’s data went to trial, and all judgments entered were in favor of defendants.
Foley & Lardner litigator Beth I.Z. Boland said the statistics illustrate that lawsuits challenging M&A activity are attorney-driven and filed “at the drop of a hat,” regardless of merit.
“Plaintiffs’ lawyers caught on to the fact that if they could extract any concession whatsoever, they could get attorneys’ fees,” said Boland, who said concessions could be as minor and nonmonetary as changing the punctuation marks in M&A disclosures to shareholders. “They are lawyer-driven cases, and that’s who benefits.”
But Thomas G. Shapiro of Boston’s Shapiro Haber & Urmy said “cases have a way of finding us,” not the other way around, and that any increase in litigation simply reflects post-recession increases in economic activity.
“As the markets are picking up, there are more deals. As there’s more activity, there’s more lawsuits,” he said. “Some cases have more merit than others, but a lot of them are very productive for shareholders, which is the point. I think it’s good that all these deals get a tough vetting. These are serious undertakings, and they take a lot of work to do. I don’t think anyone brings these suits lightly.”
A February U.S. Chamber Institute for Legal Reform study claims that the average of about $5 billion a year investors have recovered in settlements in such cases pales in comparison to the about $39 billion a year that such lawsuits cost investors. The study also notes that the plaintiffs’ lawyers bringing these cases earn about $1 billion a year.
“Unless the plaintiffs can extract additional deal consideration, there’s no value whatsoever,” Boland said. “The only people getting money are the plaintiffs’ lawyers.”
Cornerstone Research’s latest report analyzed 85 shareholder lawsuits involving M&As and found that monetary settlements “were rarer in 2013 than in prior years,” that supplemental disclosures were the only shareholder consideration in most settlements, and that the average fee requested by plaintiffs’ attorneys was $1.1 million, down from $1.4 million in the two previous years. Only two of the cases included monetary settlements of $5 million or more.
The plaintiffs’ bar and consumer advocates quickly challenged the ILR report.
“Private securities lawsuits deter malfeasance, compensate investors, and help ensure the integrity of the markets, while simultaneously enabling individual consumers who have purchased stock to seek redress in a way that would not otherwise be possible,” consumer advocacy group Public Citizen wrote in response.
Sleeping at night
While it’s certainly not true that all class actions challenging M&As are baseless, the fact that just about every deal announcement is followed shortly thereafter by a lawsuit — or at least a law firm press release announcing an investigation — understandably engenders skepticism.
It’s a trend that Boland made note of earlier this year in an Oklahoma lawsuit challenging Syntroleum Corp.’s planned sale to Renewable Energy Group Inc.
“Notwithstanding Syntroleum’s extensive efforts to find a merger partner and the negative effect this litigation can have on its shareholders, Plaintiff has rushed to the courthouse to stop the deal in its tracks,” Boland wrote in a memorandum opposing expedited discovery. “In so doing, he follows a recent trend of litigation being filed to challenge virtually every single merger shortly after its announcement … whether merited or not. … Within a week of the announcement of the transaction, Plaintiff rushed to be the first to the courthouse to enjoin the entire deal, even before the Company had an opportunity to present its rationale to shareholders.”
In Boston, boutique firm Block & Leviton often puts out the kind of press releases that cause skeptics to roll their eyes. For example, the firm announced April 4 that it was investigating Mercury Systems Inc. “for possible breaches of fiduciary duty in connection with its potential acquisition,” just one day after an analyst and Reuters, citing anonymous sources, reported Boeing was exploring a purchase of the company.
Partner Jason M. Leviton said that, while he can’t speak for other firms, Block & Leviton doesn’t pursue cases except for good reason. And while nearly every deal ultimately ends up getting challenged by someone, Leviton said his firm passes on about 90 percent of the deals they look at after keeping an eye out for three specific elements.
“Was the process fair? Was the price fair? And were the disclosures adequate to provide investors the opportunity to make a knowledgeable and thoughtful vote on whether or not to vote for or against a merger?” Leviton said. “If you don’t demand that companies disclose information, they don’t have to disclose anything, and then there’s no way to know whether to vote for or against the deal. And, quite honestly, it’s very easy to force people to vote for it.”
For example, Leviton said, a company founder could offer to take his company private for $42 a share when it’s trading at $40 a share, touting the premium he’s paying but not mentioning that the stock historically traded at around $100 a share before a one-time negative event prompted a sell-off.
“Now what you’ll see in their press release is, ‘We’re offering this great premium. We’re helping everybody out,’” Leviton said. “But what you see when you start looking into it [is] you offered a premium from the day before, but what about last month? Oh, wait a minute, it’s a negative. What about the last three months’ average? Oh, wait, that’s a negative. … What about the last five years? Still a negative.”
In its news release announcing the Mercury Systems investigation, Block & Leviton noted that the company has no debt, is well capitalized and that the reported $500 million offer from Boeing “would reflect a paltry premium of only 8.7% of the current trading price of the stock” after the company’s stock had “skyrocketed” 36 percent in two months with “no signs of stopping its explosive growth.”
“When we do these types of cases and we do them on a contingency fee we can help bring a level of excellence to the table for people who very well might not be able to afford it under a typical hourly rate scenario,” said Leviton, noting the work the firm has done on behalf of pension funds and regular Joes who have their life savings tied up in a company’s stock. “I always say it’s easy to sleep at night when you do the work we do.”
Regardless of how one feels about such cases, the availability of work targeting mergers and acquisitions may slow down regionally.
While M&A activity is on the rise nationally, the number of deals in New England dropped 19.8 percent to 243 in 2013, according to Mergermarket, and their aggregate value of $24.8 billion was the region’s lowest deal value total since 2002. New England’s share of total U.S. M&A value fell from 9.1 percent in 2010 to 2.8 percent in 2013. Massachusetts specifically saw a 23.7 percent decrease in deal value and a 29.1 percent decrease in deal count, according to Mergermarket’s 2013 trend report for New England.
And when it comes to another type of shareholder class actions — securities fraud cases — a pending U.S. Supreme Court decision could drastically alter the landscape. In Halliburton v. Erica P. John Fund, the court has been asked to reconsider the long-recognized presumption that investors have relied on misstatements, whether they prove that they have or not, based on the “fraud on the market” theory that markets are efficient and any pertinent information, including misstatements, are immediately reflected in a company’s share price.
Securities litigator William A. Haddad of Beck, Reed, Riden in Boston said he believes the theory is flawed because, “as we’ve seen, there’s great irrationality in the market.” He said the Supreme Court justices hinted during oral arguments that they may at least modify, if not eliminate, the presumption.
“The presumption is a cornerstone of how class actions are brought,” Haddad said. “The bottom line is that if the fraud on the market presumption is pulled back, plaintiffs’ lawyers will have a hard time proving reliance up front. I think it’s fair to say it’s going to be disruptive to the whole plaintiffs’ bar. It’s going to be a sea change.”