The US Chamber of Commerce has a new report on the growing problem of M&A litigation. With virtually every merger deal triggering a race to the courthouse, the need for reform has become glaringly apparent:
Securities class action lawsuits have long been plagued by abusive practices. But the trial lawyers’ latest litigation tactic—across-the-board unjustified legal attacks on mergers and acquisitions—reaches a new low.
Here’s how it works: Just about every merger or acquisition that involves a public company and is valued over $100 million—91% of all such transactions in 2010 and 2011—becomes the subject of multiple lawsuits within weeks of its announcement. Because the parties to the merger want to close their deal and begin to reap the economic benefits of the combination, the vast majority of these lawsuits settle quickly—within three months—and typically provide little or no benefit for shareholders. But the settlements do award large attorneys’ fees to the lawyers who filed the lawsuits.
This is extortion through litigation, plain and simple. Trial lawyers hold transactions hostage until they collect a “litigation tax,” draining a share of the merger’s economic benefit away from shareholders and into the lawyers’ own pockets. Because this litigation is filed in multiple courts throughout the country—state and federal—judges today cannot stop the abuse. Action by Congress and state legislatures is needed now to prevent trial lawyers from obstructing economically beneficial transactions and diverting hundreds of millions of dollars away from productive uses, injuring the very shareholders they claim to represent. This paper analyzes the remarkable M&A litigation explosion.