Shareholder Litigation Involving Mergers And Acquisitions

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CORNERSTONE RESEARCHRecent Developments inShareholder Litigation InvolvingMergers and Acquisitions

For more than twenty-five years, Cornerstone Research staff haveprovided economic and financial analysis in all phases of commercial litigation and regulatory proceedings.We work with a broad network of testifying experts, including faculty and industry practitioners, in a distinctive collaboration. Ourstaff consultants contribute expertise in economics, finance,accounting, and marketing, as well as business acumen, familiaritywith the litigation process, and a commitment to produce outstanding results. The experts with whom we work bring the specialized expertise of researchers or practitioners required to meetthe demands of each assignment.Cornerstone Research has more than four hundred staff andoffices in Boston, Los Angeles, Menlo Park, New York, San Francisco, and Washington.Reports like this one are purposely brief, often summarizing published works or other research by Cornerstone Research staff andaffiliated experts. The views expressed herein are solely those ofthe authors, who are responsible for the contents of this report, anddo not necessarily represent the views of Cornerstone Research.Additional information about Cornerstone Research consulting services is available through our Boston, Los Angeles, Menlo Park,New York, San Francisco, and Washington offices as well as fromwww.cornerstone.com.

CORNERSTONE RESEARCHRECENT DEVELOPMENTS IN SHAREHOLDER LITIGATIONINVOLVING MERGERS AND ACQUISITIONSShareholder litigation challenging merger and acquisition (M&A) deals has increasedsubstantially in recent years. To study this increase and characterize the recent litigation,Cornerstone Research and Professor Robert Daines of the Stanford Law School reviewedreports of M&A shareholder litigation in Securities and Exchange Commission (SEC)filings related to acquisitions of U.S. public companies valued over 100 million andannounced in 2010 or 2011.1 We found that almost every acquisition of that size elicitedmultiple lawsuits, which were filed shortly after the deal’s announcement and often settledbefore the deal’s closing. Only a small fraction of these lawsuits resulted in payments toshareholders; the majority settled for additional disclosures or, less frequently, changes inmerger terms, such as deal protection provisions. Interestingly, while requiring additionaldisclosures is a common outcome, we have not encountered a case in which shareholdersrejected the deal after the additional disclosures were provided.In this report, we provide statistics on recent M&A shareholder lawsuits, describingtheir prevalence, filing timelines, venue choices, outcomes, and settlement terms.TYPICAL ALLEGATIONSShareholder lawsuits objecting to an M&A transaction usually are filed as class actions orderivative suits. Shareholders typically allege that the target’s board of directors violated itsfiduciary duties by conducting a flawed sales process that failed to maximize shareholdervalue. Common allegations include the deal terms not resulting from a sufficiently competitive auction, the existence of restrictive deal protections2 that discouraged additional bids,or the impact of various conflicts of interests, such as executive retention or change-ofcontrol payments to executives. Complaints also typically allege that a target’s board failedto disclose sufficient information to shareholders to enable their informed vote. Insufficientdisclosure allegations have focused on information related to the sale process, the reasonsfor the board’s actions, financial projections, and the financial advisors’ fairness opinions.This report was prepared by Cornerstone Research in cooperation with Professor Robert Daines, thePritzker Professor of Law and Business at the Stanford Law School. Professor Daines’s recent researchfocuses on merger litigation, corporate governance rankings, and shareholder voting. He is also a director ofthe Rock Center for Corporate Governance at Stanford University and a former member of the NASDAQStock Market Review Council.1

CORNERSTONE RESEARCHPREVALENCE2We identified 789 lawsuits filed for acquisitions of U.S. public companies valued at or over 100 million announced in 2010, and 696 lawsuits filed for such deals announced in 2011.To examine a historical trend, we compared the number of M&A shareholder lawsuitsvalued at or over 500 million for deals announced in 2007 with those announced in 2010and 2011 and found that the number of lawsuits increased almost twofold (Table 1).Because M&A activity declined in 2010 and 2011 compared with 2007,3 the increasein the number of lawsuits translates into a much higher incidence of lawsuits for 2010 and2011 deals. Whereas only about half of the acquisitions announced in 2007 and valued at orover 500 million were challenged, almost every such acquisition in 2010 and 2011 was thetarget of litigation, and each challenged deal attracted many more lawsuits (Figure 1 andTable 1).GROWTH IN M&A SHAREHOLDER CHALLENGES, 2007 AND 2010–2011ACQUISITIONS VALUED AT OR OVER 500 MILLIONNumber of lawsuits filedIncrease compared to 2007Number of deals litigatedNumber of lawsuits per ble 1PERCENTAGE OF DEALS SUBJECT TO LITIGATION95%96%2010201153%2007Acquisition Announcement YearSource: SDC and SEC filings.Data include acquisitions announced in 2007 and 2010–2011 valued at or over 500 million.Figure 1

CORNERSTONE RESEARCHThe high incidence of shareholder litigation is not limited to the largest deals. As shownin Table 2, the vast majority of deals announced in 2010 and 2011 and valued between 100and 500 million were also challenged with multiple lawsuits per deal.INCIDENCE OF LITIGATION BY DEAL VALUEACQUISITIONS VALUED AT OR OVER 100 MILLION ANNOUNCED IN 2010 AND 2011Percentage of deals litigatedNumber of lawsuits per dealOver 1 Billion 500 Millionto 1 Billion 100 Millionto 500 MillionAll Over 100 Million96%6.194%4.785%4.191%5.1Table 2Table 3 shows the most litigated deals of 2010 and 2011—those that attracted fifteenor more lawsuits. These deals ranged in value from 280 million to 29 billion. Whilethe value of the deal may contribute to the likelihood of M&A litigation, these data showthat deal size is not the only determinant. The Blackstone acquisition of Dynegy attractedthe most lawsuits but was valued at less than 1 billion. Relatively small acquisitions ofConexant Systems, Force Protection, and American Oil & Gas also attracted more thanfifteen lawsuits.DEALS WITH FIFTEEN OR MORE LAWSUITS FILEDACQUISITIONS VALUED AT OR OVER 100 MILLION ANNOUNCED IN 2010 AND 2011TargetDynegyMedco Health SolutionsEl PasoNovellConexant SystemsQwest CommunicationsForce ProtectionJ. Crew GroupMotorola MobilityAmerican Oil & GasDel Monte FoodsTable 3AcquirerDeal Value(Millions)Number ofLawsuits FiledBlackstoneExpress ScriptsKinder MorganAttachmateStandard MicrosystemsCenturyLinkGeneral DynamicsLeonard GreenGoogleHessKKR 600 29,370 24,000 2,200 280 22,400 390 3,000 12,450 440 4,00029222119181717161616153

CORNERSTONE RESEARCHFILING TIMELINE4Some reports suggest that the increase in the number of lawsuits challenging the same dealhas led to a “race to file” lawsuits after a deal is announced.4 Our analysis confirms thatfilings have quickly followed deal announcements but does not show that a “race to file”has reduced the time to file in recent years as compared with 2007. We find that about twothirds of the lawsuits we identified were filed within two weeks after a deal’s announcement. Filing speed, however, has not increased for deals between 2007 and 2010–2011. Onthe contrary, as shown in Figure 2, the proportion of lawsuits filed in the first week after adeal’s announcement declined from 53 percent in 2007 to 45 percent in 2010 and to 40 percent in 2011. In all three years, approximately one-seventh of all lawsuits were filed morethan four weeks after a deal’s announcement.TIME BETWEEN DEAL ANNOUNCEMENT AND LAWSUIT FILING% Lawsuits53%45%200740%23%2010201126%20%14%13% 14%7%7 or less8–1415–21Days to Case Filing13% 13%7%5% 6%22–2829 or moreSource: SDC, SEC filings, dockets, and public press.Data include acquisitions announced in 2007 valued at or over 500 million and announced in 2010 and 2011 valued at orover 100 million.Figure 2

CORNERSTONE RESEARCHCHOICE OF VENUETraditionally, the Delaware Court of Chancery has been the venue of choice for litigationinvolving M&A targets incorporated in Delaware.5 Beginning in the early 2000s, however,much of this litigation moved to other state courts, a trend that has attracted the attention of academic researchers and industry observers and prompted the term “flight fromDelaware.”6Our analysis confirms that many M&A lawsuits involving targets incorporated inDelaware are not filed in the Delaware Court of Chancery but also finds that the share ofM&A lawsuits filed elsewhere has not increased since 2007. Approximately two-thirds ofall lawsuits involving targets incorporated in Delaware were filed outside of the DelawareCourt of Chancery. This percentage, however, has not increased between deals announcedin 2007 and deals announced in 2010–2011 (see Table 4).COURT OF FILING FOR LAWSUITS INVOLVING TARGETS INCORPORATED IN DELAWAREPERCENTAGE OF ALL LAWSUITS FILEDACQUISITIONS VALUED AT OR OVER 500 MILLIONDeals announced in 2007Deals announced in 2010–2011Table 4FederalCourtsDelaware Courtof ChanceryOther StateCourts2%11%34%41%64%48%5

CORNERSTONE RESEARCHThe most striking trend in venue choice for M&A litigation is not a flight from orreturn to Delaware, but that challenges to the same deal in both Delaware and some othervenue are now more common (see Figure 37 ).VENUES IN WHICH ACQUISITIONS OF COMPANIES INCORPORATED IN DELAWAREARE CHALLENGEDDelaware OnlyDelaware and OtherOther e: SDC and SEC filings.Data include acquisitions announced in 2007 and 2010–2011 valued at or over 500 million.Figure 32011

CORNERSTONE RESEARCHWe also examined which state courts (other than the Delaware Court of Chancery)were most active in M&A shareholder litigation involving all targets. Most lawsuits broughtin non-Delaware state courts were in California, Texas, and New York, likely reflectingwhere many deal targets are headquartered. To compare litigation across states, in Table 5,we report the average number of lawsuits filed per deal in each state and the average timebetween the deal announcement and the lawsuit filings. Texas and Illinois had the largestnumber of competing lawsuits, and Illinois and Washington had the fastest filers (on average, fewer than seven days). The bottom panel of the table shows that, on average, it tookmuch longer to file in federal courts than in state courts.STATES (OTHER THAN DELAWARE) IN WHICH SIX OR MORE DEALS WERE LITIGATEDACQUISITIONS VALUED AT OR OVER 100 MILLION ANNOUNCED IN 2010–2011Average Number ofLawsuits per DealTexasIllinoisMinnesotaNorth CarolinaMarylandCaliforniaWashingtonFloridaNew JerseyNew lTable age Timeto File (Days)Numberof 21.614.737.12714116105967823101518147947

CORNERSTONE RESEARCHOUTCOMESThe data confirm that M&A shareholder lawsuits typically settle and often settle quickly.We were able to track to resolution 565 challenges of 2010–2011 M&A deals (76 percent ofall proceeding lawsuits in our sample).8 Of these lawsuits, 153 (27 percent) were voluntarilydismissed by the plaintiffs, twenty-three (4 percent) were dismissed by the court with prejudice, and 389 (69 percent) settled (see Figure 4).LITIGATION OUTCOMESSettled8Voluntarily DismissedDismissed by CourtPending and Unknown161101228624591122151020075320102011Source: SEC filings and dockets.Data include acquisitions announced in 2007 valued at or over 500 million and announced in 2010 and 2011 valued at orover 100 million. Only lawsuits proceeding after consolidation and stay are included.Figure 4

CORNERSTONE RESEARCHThese findings show a significant change from the outcomes observed a decade ago.Thompson and Thomas (2004) examined M&A lawsuits filed in the Delaware Court ofChancery in 1999 and 2000 and found that 59 percent of these were dismissed and only28 percent settled.9Of the 190 unique settlements10 we identified, 180 were reached before the mergerclosed.11 Most of these were reached shortly before a hearing on the plaintiffs’ motionfor preliminary injunction (restraining order) or shortly before the shareholder vote. Themedian time between lawsuit filing and settlement in this sample was forty-four days. Table6 shows the distribution of the settlement time.TIME BETWEEN LAWSUIT FILING AND SETTLEMENTACQUISITIONS VALUED AT OR OVER 100 MILLION ANNOUNCED IN 2010–2011Days between Lawsuit Filingand Settlement20 or less21 to 4041 to 6061 to 8081 to 100More than 100Total12Table 6Numberof LawsuitsPercentof All Lawsuits53846638293018%28%22%13%10%10%3009

CORNERSTONE RESEARCHSETTLEMENT TERMS10Settlement terms have changed over the last decade. Thompson and Thomas (2004) foundthat for lawsuits filed in Delaware in 1999 and 2000, the majority (52 percent) of settlementsincluded cash awards, and only a fraction (10 percent) involved additional disclosures only.13This distribution has reversed in recent years. Of the 190 unique reported settlementsrelated to 2010–2011 M&A deals, only nine (5 percent) resulted in payments to shareholders (Table 7),14 and a large majority of settlements (156 or 82 percent of the sample) settledfor additional disclosures only. Twenty-five settlements (13 percent) included merger agreement changes other than payments to shareholders. Fourteen of these (7 percent of theunique settlements) resulted in modified deal protection provisions (such as terminationfee, no-solicitation, and matching rights). None of these changes resulted in a higher bidfor the target. Other merger agreement changes included the terms of top-up option andappraisal rights. Eleven settlements (6 percent) involved other terms, most often a delay ofthe shareholder vote.PAYMENTS TO SHAREHOLDERS AS PART OF SHAREHOLDER LITIGATION SETTLEMENTACQUISITIONS VALUED AT OR OVER 100 MILLION ANNOUNCED IN 2010–2011DealSettlement Payment to Shareholders (Millions)Del Monte Foods/KKRGSI Commerce/eBayJ. Crew Group/Leonard GreenMediacom Communications MBOStudent Loan Corp./DiscoverTalecris Biotherapeutics/GrifolsAtlas Energy/ChevronProtection One/GTCR 89.4 24.0 16.0 10.3 10.0 8.1 5.0 3.2NYSE Euronext/Deutsche BörsePostmerger dividend to all shareholdersof the merged entityTable 7The largest of the recent settlements—an 89 million settlement in October 2011 in theDel Monte Foods buyout—attracted much attention in M&A circles. The Del Monte Foodscase first made headlines in February 2011 when the Delaware Court of Chancery awardeda preliminary injunction of the shareholder vote.15 The court focused on the allegation thatDel Monte’s financial advisor, Barclays Capital, also helped with the buy-side financing ofthe deal and failed to disclose to the target its relationship with the buyer. Vice-ChancellorLaster opined that Del Monte’s board “fail[ed] to provide the serious oversight that wouldhave checked Barclays’ misconduct.” The final 89.4 million settlement included a 23.7million payment by Barclays.16

CORNERSTONE RESEARCHPLAINTIFF ATTORNEY FEESThe amount of plaintiff attorney fees was reported for 81 of the 190 settlements.17 Morethan half of the settlement reports did not disclose the amount of fees, and there is noinformation that allows us to determine whether the amounts reported for the 81 settlements are representative of the amounts for the settlements with no fee reports. The average fee reported was 1.2 million, but the average is heavily influenced by a few large feeawards as shown in Figure 5. Only nineteen (23 percent) of the reported attorney fees were 1 million or higher. On the other hand, 43 percent of the reported attorney fees were at orunder 500,000.11PLAINTIFF ATTORNEY FEES231291094Under 400 400–500 501–600 601–700 701–800Thousands3 801–90092 901– 999 1,000–1,500MoreSource: SDC, SEC filings, dockets, and public press.Data include unique settlements of lawsuits related to acquisitions valued at or over 100 million announced in 2010 and 2011.Figure 5

CORNERSTONE RESEARCHTable 8 shows all identified instances of plaintiff attorney fees in excess of 2 million in2010 and 2011. By far, the highest fee was in the Del Monte Foods settlement, which alsoincluded a large payment to Del Monte’s shareholders. However, other large plaintiff attorney fees shown in the table were not necessarily associated with large shareholder payments,and several were not associated with any shareholder payments. The amount of attorneyfees relative to the settlement payment also varied greatly—from 7 percent in the case ofStudent Loan Corporation to 71 percent for Protection One, Inc.PLAINTIFF ATTORNEY FEES IN EXCESS OF 2 MILLION IN LITIGATION SETTLEMENTSACQUISITIONS VALUED AT OR OVER 100 MILLION ANNOUNCED IN 2010–201112DealDel Monte Foods/KKRFees(Millions)SettlementPayment(Millions) 25.25 89.4Coca-Cola Enterprises/ Coca-Cola 7.5Alberto-Culver/ Unilever 6.5Terremark Worldwide/ Verizon 4.1Mediacom Communications MBOStudent Loan Corp./DiscoverArena Resources/SandRidge Energy 3.5 3.5Protection One/GTCR 2.3Table 8 10.3 10.0 2.5 3.25Other Settlement TermsReduced termination fee and additionaldisclosures.Reduced termination fee and additionaldisclosures.Extended tender period by 11 days,eliminated force-the-vote, reducedtermination fee, and additional disclosures.Additional disclosures.Additional disclosures.Modified no-shop provision and matchingrights and additional disclosures.Extended appraisal rights, modified thetop-up option, and additional disclosures.

CORNERSTONE RESEARCHENDNOTES1 For historical comparison, we also collected information on M&A shareholder litigation of dealsvalued over 500 million and announced in 2007. Statistics on the deals announced in 2011 excludethe acquisitions announced after December 15, for which no proxies have been filed with the SEC.2 Typical deal protection provisions of merger agreements include termination (break-up) fees thatthe target has to pay to the acquirer if the target terminates the deal under certain circumstances,no-solicitation (no-shop) provisions that prevent the target from negotiating with additional biddersunless presented with a potentially superior bid, and matching rights that allow the acquirer to matcha superior offer.3 The Thompson Reuters SDC Platinum database reported that 195 deals valued over 500 millionwere announced in 2007, and only 108 and 80 such deals were announced in 2010 and 2011, respectively. This count excludes the following acquisitions reported by the SDC:(1) unsolicited bids rejected by the targets;(2) share repurchases, block purchases, and convertible notes tender offers mistakenly reported asacquisitions;(3) foreign targets mistakenly reported as U.S. companies;(4) targets that do not file with the SEC;(5) asset sales from bankruptcy; and(6) second bids for the same target (litigation is often filed for the first bid, and then allegations aremodified to address the second bid).4 See, for example, John Armour, Bernard S. Black, and Brian R. Cheffins, “Delaware’s BalancingAct,” working paper, July 2011. See also Matthew D. Cain and Steven M. Davidoff, “Delaware’sCompetitive Reach,” Journal of Empirical Legal Studies, forthcoming 2012.5 Of the targets in our sample, 70 percent were incorporated in Delaware.6 See, for example, John Armour, Bernard S. Black, and Brian R. Cheffins, “Delaware’s BalancingAct,” working paper, July 2011. See also Matthew D. Cain and Steven M. Davidoff, “Delaware’sCompetitive Reach,” Journal of Empirical Legal Studies, forthcoming 2012.7 Figure 3 shows the courts of filing on the deal level as opposed to the level of lawsuit shown in Table 5.8 Of the 1,485 reported lawsuits related to acquisitions valued at or over 100 million announced in2010–2011, 745 were consolidated or stayed. Of the 740 lawsuits that proceeded, ninety are still pending, and we have not been able to determine the status of the remaining eighty-five lawsuits.9 Thompson, Robert B. and Randall S. Thomas, “The New Look of Shareholder Litigation:Acquisition-Oriented Class Actions,” 57 Vanderbilt Law Review, 133 (2004).10 Several lawsuits often settle together. In these cases, all lawsuits are included in the number of settledlawsuits (389), but the settlement is counted only once in the number of unique settlements (190).11 Most target companies stop filing with the SEC after the merger closes, and therefore, data on postmerger settlements are not available in SEC filings.12 The total number of lawsuits where both the filing date and the settlement date were available. Inmost cases, the settlement date is the date on which the parties signed a memorandum of understanding that first defines the preliminary settlement terms.13 Thompson, Robert B. and Randall S. Thomas, “The New Look of Shareholder Litigation:Acquisition-Oriented Class Actions,” 57 Vanderbilt Law Review, 133 (2004).14 A tenth company, Buckeye GP Holdings, reported that it agreed to pay 900,000 “in settlementof the plaintiffs’ claims (including any claim against the defendants by the plaintiffs’ counsel forattorneys’ fees or expenses related to the litigation).” Buckeye GP Holdings Form 10-Q filed onNovember 8, 2010. It is not clear whether any of this amount was paid to shareholders.15 In re Del Monte Foods Company Shareholders Litigation, C.A. No. 6027-VCL, 2011 WL 532014 (Del. Ch.February 14, 2011), Opinion by Vice Chancellor Laster.16 In re Del Monte Foods Company Shareholders Litigation, “Stipulation and Agreement of Compromise andSettlement,” filed with the Delaware Court of Chancery on October 6, 2011.17 Most of the fee amounts are those reported in settlement summaries contained in SEC filings, notthe fees approved by courts.13

Please direct any questions or requests for additional information to:Olga Koumrian650.470.7053 or okoumrian@cornerstone.comThe information and data contained in this report are the property ofCornerstone Research. Please reference Cornerstone Research inany reprint of this information.Boston617.927.3000Los Angeles213.553.2500Menlo Park650.853.1660New York212.605.5000San nerstone.com 2012 by Cornerstone Research, Inc. All Rights Reserved.Cornerstone Research is a registered service mark of Cornerstone Research, Inc.C logo and design is a registered trademark of Cornerstone Research, Inc.

Cornerstone Research and Professor Robert Daines of the Stanford Law School reviewed reports of M&A shareholder litigation in Securities and Exchange Commission (SEC) filings related to acquisitions of U.S. public companies valued over 100 million and announced in 2010 or 2011. 1. We

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