My November 19 post referenced Dan Fisher’s recent Forbes piece on a securities suit filed against Berkshire Hathaway a few hours after it’s announcement of a $26 billion acquisition of BNSF. This and similar lawsuits usually allege that the officers/directors negotiated/agreed to terms which failed to maximize shareholder value.
Unlike traditional securities class actions which allege violations of Rule 10b-5, or shareholder derivative cases which are brought by a shareholder in the name of the corporation, takeover suits are traditionally brought in state courts under state law and are not governed by the Private Securities Litigation Reform Act (the PSLRA).
The inapplicability of the PSLRA means the the “first to file” rule (and all it implies) still applies to takeover litigation. Indeed, Fisher argues that these lawsuits are filed without so much as a good faith belief in the very claims they advance, but are rather:
…designed to capitalize on the dynamics of acquisitions. To avoid further lawsuits companies frequently announce a takeover price that they later negotiate upward, providing strong evidence that the ultimate price was arrived at through arms-length bargaining.
If a substantial portion of takeover litigation is lawyer-driven and aimed at recovering fees for doing little more than filing a complaint with the court clerk faster than anyone else (not an Olympic event as far as I know) then the transactional inefficiencies on mergers and acquisitions generally could be quite significant.
However, even if the litigation costs associated with a single major acquisition can easily be shrugged off, the systemic inefficiencies cannot. A 2004 Vanderbilt Law Review Article by Robert Thompson and Randall Thomas highlights just how prevalent these suits are:
When we analyzed data that we had collected on all suits filed in 1999 and 2000 in the Delaware Chancery Court, the nation’s leading corporate trial court, we were surprised to find that approximately 80 percent of the breach of fiduciary duty claims, the vast bulk of state court representative litigation are class actions against public companies challenging director action in an acquisition.
These acquisition-oriented class actions dominate all other forms of state court shareholder litigation. Moreover, in 1999 and 2000, the number of these class actions filed in Delaware alone equaled about half of the total number of federal securities fraud class actions filed in all federal district courts during that same two-year period.
Given the potentially unnecessary systemic litigation costs involved, this issue cries out for further empirical investigation.
Filed under: Litigation, Opinion, PSLRA, securities
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