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By Yin Wilczek
Feb. 26 — Given the inevitability of shareholder lawsuits in state court challenging mergers and acquisitions transactions, companies undertaking such activities should involve litigators early in the process, attorneys said Feb. 25.
Litigation specialists should participate in the review of draft disclosure documents at the time they're circulated, said Deborah Birnbach, a Boston-based partner at Goodwin Procter LLP. One important consideration during the review process is preservation of the attorney-client privilege, especially when the parties are circulating draft documents to others that may be outside the privilege shield, she said.
Michael Jones, a Goodwin Procter partner based in Silicon Valley, Calif., added that the early involvement of litigators during the deal process can help to avert potential problems.
“We have noticed that the earlier we get involved in reviewing these disclosures and helping during the process, we avoided some potential landmines in M&A litigation and helped things proceed more smoothly once the inevitable litigation is filed,” Jones said.
The attorneys, both litigators, also suggested several strategies to avoid disclosure pitfalls in M&A challenges. They spoke at a Practising Law Institute webcast, adding that the views they expressed may not necessarily reflect those of their firm or its clients.
According to a Feb. 25 report by Cornerstone Research, stockholders challenged 93 percent of M&A transactions in 2014.
The cases were filed in Delaware for 88 percent of the deals, Cornerstone found.
Birnbach said that when litigators are involved in the review of draft documents, they typically focus on the background of the merger or offer section—the part that gives a chronological account of how the deal was reached. They also review conflict-related disclosures and disclosures related to financial advisers' analyses in fairness opinions, she said.
“We absolutely try to weigh in before the drafts go across the transom to the bankers or to the transaction partners in a nonprivileged fashion,” she said.
The Goodwin Procter attorneys also noted that there is no bright line regarding the information that must be disclosed to shareholders to avoid litigation. Disclosure obligations continue to evolve with the “ebb and flow” of litigation, Birnbach observed.
“The rule of thumb is to disclose enough to allow” stockholders to make an informed decision, Jones said. He added that while material information must be disclosed, the tougher call is deciding whether interesting or helpful data is material and thus warrants disclosure. “In those situations, I always advise clients” to take their time, talk it through, analyze what the information is and how it might be perceived by investors, he said.
In addition, companies may want to consult case law to see if the courts have dealt with a similar fact pattern, or review M&A-related disclosures of companies in similar industries, the attorneys suggested.
The attorneys noted that some courts—notably those in Delaware and New York—have balked at rubber stamping disclosure-based settlements and are scrutinizing the pacts to ensure that the supplemental disclosures are material or useful enough to justify the settlements.
In line with more rigorous court scrutiny, companies also are starting to mount spirited defenses to merger strike suits because they find that early settlement isn't necessarily cost effective, Birnbach said.
The Cornerstone report found that in 2014, only 59 percent of M&A-related litigation was resolved before the transactions concluded, compared to 74 percent in 2013.
Meanwhile, the typical disclosure claims filed by plaintiff shareholders generally allege material omissions in connection with:
• the deal process;
• fairness analysis and projections; and
• conflicts of interest with respect to directors or financial advisers.
The attorneys offered some key takeaways regarding such claims. In connection with the deal process, they suggested that companies:
• disclose key “touch points” between the target company and potential bidders and key considerations of the target company's board and management; and
• identify potential “soft spots” before making initial disclosures and consider how to appropriately address these during the drafting process.
In disclosing key considerations of the board and management, companies should ensure they review e-mail communications, telephone records and other materials to ensure everything is cross-referenced and consistent, Jones said. They also should ask for backups of the materials.
“The earlier you” deal with this the better, he said. “This may save you headaches down the road.”
As for disclosure claims related to the fairness analysis or issuer projections, companies should:
• work with their financial advisers to disclose a “fair summary” of the analyses undertaken to evaluate the proposed deal;
• review bankers' books presented to the board during the disclosure drafting process; and
• disclose all projections—including alternate cases or updates—provided to and relied upon by advisers.
During the drafting process, it is important that companies review the bankers' presentations and other materials to determine if they have questions, Jones said. “If you do, it's more likely than not that things can be said better,” or more completely or clearly to avoid a potentially viable shareholder disclosure claim.
Jones also warned that where plaintiffs' firms have obtained a significant victory, they likely will file similar claims in other cases going forward. “We're seeing it pretty regularly now,” he said. “If they win big on something, you can be assured you will see that allegation made in every case for the next 18 to 24 months.”
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Cornerstone's report is available at https://www.cornerstone.com/Publications/Press-Releases/New-Report-by-Cornerstone-Research-Points-to-Shifts-in-M-and-A-Litigation.
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