According to recent research by Cornerstone, 9 out of 10 mergers in 2010 and 2011 with a value of more than $100 million involved some form of dispute amongst the shareholders. As companies have no control over a shareholder’s choice to file a lawsuit against them, many are now seeking preventative measures to try and effectively avoid such litigation. To find out more about this, Lawyer Monthly speaks to Christine S. Azar and Michael W. Stocker from Labaton Sucharow LLP in the U.S.
Please introduce yourself and your firm.
Labaton Sucharow has an unusual dual role as a leader in both the securities class action bar and the booming field of merger and acquisition and shareholder derivative litigation. With more than fifty years of experience in litigating securities fraud cases and more than $6 billion in recoveries, the Firm’s deep bench of experience makes it go-to counsel for some of the largest institutional investors in the world.
The Firm’s services are not limited to securities fraud class actions, however. Labaton Sucharow has been successfully pursuing shareholder representative and derivative actions on behalf of investors for more than 20 years. The Firm, which consists of more than 60 attorneys, is a long-time defender of shareholder rights specializing in litigating actions related to freeze-out mergers and acquisitions, and has successfully prosecuted claims relating to executive compensation, interested party transactions, and other forms of misconduct.
The Firm maintains a Delaware office specializing exclusively in derivative and direct shareholder litigation, headed by partner Christine S. Azar, who has more than 10 years of experience in Delaware Court of Chancery. Because the Delaware courts put a premium on experience and familiarity with Chancery practice, our permanent presence in Wilmington is a great benefit to our clients.
The work of our Delaware office is complemented by Partner Mike Stocker of Labaton Sucharow’s New York office, who focuses on regulatory, corporate governance, and policy issues affecting investors.
A recent report released by the U.S. Chamber of Commerce’s Institute of Legal Reform discussing the increase in shareholder lawsuits in the wake of M&A deals being announced has highlighted the increasing trend of this type of litigation and asking Congress to intervene through new legislation. Have you noticed an increase in M&A litigation?
There has indeed been an increase in M&A litigation in transactions of all sizes, but that increase is due in large part to a perfect storm of economic conditions that fosters transactions that are unfavorable to many shareholders. The recent appeal for legislative action is little more than a well-timed effort to stymie investor advocates when shareholder protections are needed most.
If so, to what do you attribute this increase?
Enormous amounts of capital have been sidelined by the fragile recovery of last four years, and share prices in many companies are still depressed when compared to historic values. These conditions, together with the increased presence of advisors who play a simultaneous role on both sides of transactions, have unfortunate consequences for shareholders of target companies.
Indeed, despite recent criticism from the courts, we continue to see overly cozy relationships between companies and bankers that issue purportedly independent financial opinions. In order to maintain the integrity of the financial markets and to protect investors, there must be a mechanism for addressing this dangerous conflict of interest.
Have there been any recent M&A litigations that have had an effect on the M&A market? If so, please explain.
What do you think Congress will do in response?
Delaware has a long standing and well developed body of law surrounding the rights and duties in the M&A context. The Delaware Court of Chancery and Delaware Supreme Court are the acknowledged experts in the field. These courts have and will continue to provide monitoring to weed out meritless cases while providing the necessary relief where breaches have occurred. In the wake of a financial crisis fuelled by conflicts of interest and unregulated markets, shareholders deserve more protection, not less. We hope voters who invest in the capital markets and have weathered the successive waves of financial crises and frauds in recent years will tell their legislators that they oppose any attempt by the corporate lobby to weaken investor safeguards.
What do you think should be done?
The proliferation of litigation will require additional efforts to ensure efficient coordination of these actions. In particular, some mechanism needs to be adopted to deal with the issue of multi-jurisdictional litigation. The courts of Delaware have made clear that the issues that arise in the M&A context involve fundamental questions of Delaware corporate law where the company is incorporated there. Comity must be shown by courts in other jurisdictions to this view. Additionally, we would not be opposed to reforms designed to streamline the selection of lead plaintiffs encouraging shareholders who, based on resources, size of investment, experience of counsel, etc., are best equipped and motivated to prosecute these cases on an expedited basis could promote judicial efficiency and the filing of meritorious suits—a shared interest of shareholder plaintiffs, corporate defendants and the courts.
The litigation involving the acquisition of El Paso Corporation by Kinder Morgan illustrates the kinds of conflicts of interest that are now seen so commonly in transactional litigation. In the merger, El Paso’s financial advisor, Goldman Sachs, had a significant ownership interest in the buyer, Kinder Morgan. Additionally, a key team member of the Goldman team advising on the transaction had a personal ownership interest in Kinder Morgan. Although he denied a request to enjoin the transaction, Chancellor Strine of the Delaware Court of Chancery was highly critical of the arrangement due in large part to the misaligned incentives it created. Since this case, bankers are on notice that their conflict policies must be designed to learn of any similar problematic ownership interests and to take appropriate steps to eliminate the conflict if they do exist.
What do you think 2013 holds for M&A?
With the uncertainty of the election behind us, the market may begin to come out of the slow down we saw in 2012. Numerous acquisitions in the healthcare field are likely. Global financial issues will continue to have a dampening effect, but the availability of capital should fuel an uptick in merger and acquisition activity.