How common are class action lawsuits by shareholders of M&A targets? The reason I ask is because I can think of deals where investors in the acquirer thought the deal was overpriced, but shareholders of the target also filed class auction lawsuits saying that their target was undervalued. The acquisition offer for the target was about 20% higher than the prior week’s closing prices.
Can anyone please comment on how frequently this happens? Are these lawsuits a somewhat unusual event, or will some shareholders of the target company always complain that they aren’t getting enough for their shares and therefore file a class action lawsuit? I’d like to know if these types of lawsuits can be used as any type of indication for potential overvaluation or undervaluation of the acquirer or acquiree.
I had a stock when a majority owner attempted to takeover at under book value.
the company, CNA Surety, had to sue because they did not have enough votes to block the deal.
but i suppose in a normal course of business, its up to the board of directors to block an unfair deal. afterwards, if ppl still think its unfair, you can sue the board. that’s what i think.
It seems like practically every company I see faces this during an acquisition. But an important distinction would be to ask how many of the suits actually proceed to settlement, trial or have any merit whatsoever? My guess is the answer is “not that many.” There are tons and tons of law firms dredging for business that are willing to chase ambulances. Most of the time, nothing happens even in deals that to me seem “obviously bad” for shareholders.
You can pretty much file a shareholder derivative suit for almost anything. If the company is wasting money on stupid things, in your opinion, you can sue. You can sue over M&A. You can sue if the disclosures are wrong. Most of the time it seems like the only winners are lawyers though. What’s AWESOME about shareholder derivative suits is that most of the time the penalties are paid out of shareholder capital (lulz, you just sued yourself and won basically). At some point, the line between a derivative suit and outright activist gets a little blurry IMO, because it seems the best case for a derivative suit might be to get new management in or otherwise unlock value somehow.
I don’t want to suggest there are no meritous cases because there are, but even then they are hard to prosecute (the company will fight back if it is intentionally doing something underhanded like attempting a “take under,” which is basically when the board tries to screw shareholders for its own gain somehow – I have seen that happen and it can drag on for quite some time).
Generally, my personal opinion is that if it has to even go through the courts, shareholders have already lost. The settlement will be less than what is really “owed” (although better than nothing) and it could take years to recover your capital in some cases. This is why I would rather see some kind of activist / equity or debt steering committee involved than a lawsuit, although to be honest after watching many of these play out, I’d rather just not get involved. There is often a great “case” to be made that something is extremely undervalued in these (as well as distressed) type situations, but it’s only undervalued if the ball bounces your way, and there are a lot of variables to that in most cases. Some firms exclusively specialize in finding such opportunities and I always feel like I’m a huge disadvantage without a solid background in the relevant subjects.
I guess there is an ongoing case about megafund PE bid rigging that you might also want to read about – pretty interesting and may be related to your inquiry.
normally the BoD will get a fairness opinion on the offer from an independent firm which would be publicly disclosed in the filings, and the issuance of a fairness opinion will be a condition to close the deal. it’s uncommon for a larger deal to go through without such opinion.
even then, there are numerours law firms that just wait for a deal announcement and file law suits immediately. the strategy is file first, perform due diligence later, most of these suits don’t go anywhere. it is very common
My experience is that the fairness opinion is like a lot of other investment banking transactions – in the interest of the banker. Shit, if you pay me enough, I’ll find a way to justify any deal you put across my desk. Look at the facebook IPO – pfffft.
Basically, I’m not really sure who a fairness opinion is supposed to be “fair” to – because a lot of times, it’s clearly not the shareholders. I’m talking more on the small / micro cap end of the market. Multi-billion dollar market cap companies are much less likely to try to pull BS like that, and generally have higher calibre management (both from a trustworthy perspective and also competency).
Thanks for the feedback, Mobius Striptease and bromion. I also agree that for fairness opinions (which never actually say that a deal is “unfair”…it’s just intended to inform outside investors/shareholders), you always have to look at the motivations of the bankers in a particular transaction to see whether their numbers are really fair or whether they are just painting lipstick on a pig. I looked at a few public situations in private equity and restructuring, and some of the things you have to look into in fairness opinions is whether the comparables really make sense (i.e. are these companies that similar? when did the deal take place? what was the type of deal and attitude surrounding the deal? etc.) and also whether the advising bank is involved in any other prospective business aside from the particular deal (i.e. are they underwriting any securities offerings related to the deal, etc.)
There is definitely merit to reviewing fairness opinions as they footnote everything, so you can always source thier information. However, as with most things in this industry, it’s also really important to carefully critique everything you see and ask if things really are as they appear.
if a fairness opinion were to say that the deal is “unfair”, the deal just won’t close on the original terms. that’s less likely to be public info unless leaked out, and it may not happen that often - but when it does happen you probably won’t know about it.
if you actually disagree with the independent opinion about the fairness of the deal - that’s another story, but as you mention, numi - the details about the fairness opinion analysis should be disclosed in the filings and are generally pretty informative. you can make your own decision about the validity of assumptions.
@ bromion - when the underwriter financing the deal also issues a fairness opinion, there is a clear conflict of interest… less so when an independent advisor is involved because the fairness opinion fee is not conditional on the closing. either way i’m not suggesting to rely blindly on a third party’s opinion, but to use the disclosure and their analysis in your due diligence - it can have valuable info
I’m with you, I know you weren’t suggesting that. But experience says a lot of these things are rigged and that there is a lot of bullshit in general in the capital markets.
I’ve seen “fairness” opinions on deals that resulted in the merged entity going bankrupt within 12-18 months after being substantially dilutive to the initial shareholders. Some deals just don’t make sense any way you cut it and go through for non-economic reasons.
Check out the history on XPRT some time as a case study. Pretty decent consulting business at the bottom of the cycle. They decided to buy some unrelated entity at an exorbitant price. I met with the company’s CFO and asked why, and he basically said they needed a new CEO, and the guy running the other company was a good fit – hard to see that because the guy had a background in audit at Arthur Anderson and sounded like a complete whackjob. So anyway, they spent $100mm on this deal, and this shithead takes over and proceeds to alienate the company’s senior consulting base within the first 3 - 6 months, and they start leaving. Debt + declining revenue + asshat running the company = thanks for playing.
I’m sure there was a great fairness opinion about that one as well.