The U.S. Chamber’s Institute for Legal Reform today released a study on merger-related litigation that concludes plaintiff lawyers take advantage of the court system to extract tens of millions of dollars a year in fees from companies at the expense of shareholders.
A loophole in the federal law designed to cut down on securities class-action abuses allows lawyers to file suits challenging mergers in multiple state and federal courts, the study found, making it impossible for companies to consolidate the litigation in one place and increasing the odds they’ll pay the lawyers a fee to go away. ...
The study calls the litigation a “merger tax” on corporate transactions, since lawyers now file fraud suits challenging 91% of all mergers of public companies valued at over $100 million. Either there’s been a vast increase in corporate fraud since 2005 — when only 39% of mergers drew lawsuits — or lawyers are filing more meritless suits. ...
Lawyers file suits accusing companies of fraud sometimes within hours of a merger announcement, hard to square with good-faith efforts to find a client and fully investigate that client’s claims. ...
The New York Bar Association offers another common-sense approach: Let companies contract with their shareholders to restrict litigation to the state of incorporation. That would at least eliminate the tactic of gaming multiple state courts to extract a fee, which of course is paid by the shareholders. Instead most companies would face lawsuits, at most, in Delaware state and federal court. And Delaware judges are increasingly hostile toward hastily filed merger suits.
