Drive-By Litigation: “Takeover Lawsuits”

In the current issue of Forbes, Daniel Fisher takes a closer look at a lawsuit filed against Warren Buffett’s Berkshire Hathaway a few hours after its announcement that it would be acquiring Burlington Northern Santa Fe Corp for $26 billion:

Berkshire’s offer of $100 a share was a 31% premium to the previous day’s closing price and only a little below the railroad’s all-time high of $113 a share in May 2008. But according to the suits drafted within hours of the deal’s announcement, management could–and should–have gotten more.

Securities-litigation reform laws were supposed to end the race to the courthouse, an unseemly practice designed to win control over litigation by being the first to file. But when a takeover is announced, it’s business as usual. With a speed that stretches the bounds of credulity, lawyers file suits soon after a takeover is announced in hopes of settling the case for a generous fee…

Takeover-related litigation is a specialized niche of the larger securities class-action bar, but like other shareholder actions it is largely financed by settlements. In the case of takeovers, lawyers sue hoping the ultimate purchase price is increased. If it happens they can petition the judge for a percentage of the increase, claiming it is due to their litigation.

“If the price gets modified upward, there is no doubt the lawyers will ask for a fee based on it,” said Michael Perino, a securities litigation expert at the St. John’s University School of Law. Since most of these suits can be settled for less than the cost of discovery, the court-overseen process of going through corporate records in search of evidence, companies settle them rather than litigate…

The suit was brought by the Employees Retirement System of New Orleans, a frequent plaintiff in securities cases.  Jerry Davis, the fund’s chairman, explained that the suit was brought “to determine whether the Buffett offer is the best available deal, or whether other offers have been properly analyzed.”

Without any evidence or other indication that some party breached a fiduciary obligation to the shareholders by approving the deal, these suits are attempting to use civil discovery rules to investigate whether some purely theoretical breach may have taken place.  I admit that I skipped a few days in law school, but I had no idea that particular power resided in the judiciary.

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Filed under: Litigation, Opinion, document review, institutional investors, pension funds, securities