Mergers appear to be in the news again, with a number of corporate giants announcing coming combinations.
In our February FINEX Alert, we examined data linking M&A activity to litigation, the most common allegations contained in these claims, and how the insurance marketplace for directors and officers liability (D&O) is responding to this heightened exposure.
Sadly, we appear to have gotten it right.
D&O M&A Suits Rampant *
Just last week Cornerstone Research and Stanford Law School released their latest report on this topic: Recent Developments in Shareholder Litigation Involving Mergers and Acquisitions. They specifically looked at reports of M&A shareholder litigation related to acquisitions of U.S. public companies valued over $100 million in 2010 and 2011.
Their findings: almost every acquisition elicited multiple lawsuits.
This confirmed not only the earlier data we discussed back in February but also what we have seen first-hand. Our experience is that not only are there multiple lawsuits, but:
- They are likely to be in multiple jurisdictions (in various states)
- Most will be based in state law
- Some may also allege violations of federal law (such as the securities law, if the companies involved are publicly-traded)
Personally, my record to date is learning of a possible suit within 20 minutes of a deal being announced.
Some lawsuits will be direct actions and some are likely to be derivative claims.
Derivative claims create unique concerns when it comes to D&O insurance. Derivative claims are of special interest to directors and officers, as court awards or settlements are generally non-indemnifiable and therefore fall under what is known as the A-Side of a D&O policy or under a stand-alone A-Side D&O contract. A-Side coverage is designed for just such situations. We cover this in more detail in two of our earlier FINEX Alerts:
- May 2009: Details in Delaware (Twist on Derivative Claims)
- May 2011: Derivations on Derivative Claim Coverage
Something not considered in the recent report, is the potential for an ERISA tagalong suit. That is, parallel litigation brought under the Employee Retirement Income Security Act by one’s own employee pension plan (like a 401(k) plan or stock purchase or stock ownership plan) that holds employer securities. After all, there are shareholders and then there are employee shareholders.
The most recent, excellent Cornerstone report makes sobering reading. For companies who don’t have experience addressing D&O claims, M&A activity can involve swimming in deep waters indeed.