While mergers and acquisitions can create a lot of buzz in respective industries, such as United Technologies and Raytheon, the missile defense M&A that took place earlier in 2019, they can also create major headaches for stakeholders involved. Lawsuits may arise when one party seeks out more information or claims that the price may be too low in the deal.
Whatever the cause for concern or argument may be, any lawsuits or litigation that come up can put directors and officers in the crosshairs, making coverage like management liability insurance even more important.
Shareholder lawsuits that come out of an M&A deal usually allege that the directors of the acquisition target company breached their fiduciary duties in some capacity, usually in approving the transaction. In this process, the plaintiffs typically claim that the transaction price is not enough, the directors failed to exercise due care, public disclosures related to the transaction are misleading, or some of the directors have a conflict of interest.
Litigation from shareholders usually comes from the thought that managerial agency costs are too high, and that class action lawsuits are key shareholder mechanisms meant to monitor managers. However, litigation claims are generally driven by lawyers, which reflects the agency costs that come out of contingency fee suits.
M&A lawsuits may come regardless of whether the process had major noticeable problems or not. Where shareholder litigation can’t be avoided, the main issue comes in protecting the M&A deal from a negative result. Regarding this, a board involved in the M&A deal has to demonstrate that it acted in an informed manner in deciding to approve the deal.
Opening the Door for More Revenues
Because of the pressure to get a deal done in a short amount of time, merger objection cases are usually settled in a short amount of time. During this process, companies usually provide more information and even change the terms of the deal, paying plaintiffs attorneys substantial amounts in the process.
Now, many management liability insurance providers are looking into separate and higher deductibles for these M&A lawsuits that can amount to multiple retentions of the general D&O policies.
A typical resolutions case involves attorneys’ fees to plaintiffs’ own counsel and a release for defendants in the process. M&A litigation rates as a whole have seen an increase as mostly all M&A deals valued at more than $100 million are litigated. This has created a certain kind of industry of attorneys looking to file lawsuits and bolster their streams of revenue.
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