M&A Rise Spawns Increased Litigation and Insurance Concerns
Nov 21, 2011
Increases seen in deal objection lawsuits; firms with potential M&A activity need to reevaluate their D&O coverage
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San Diego, CA, November 21, 2011 – The abundance of cash on public company balance sheets, combined with volatility which can cause depressed stock prices, has triggered a wave of mergers and acquisitions (M&A) activity in the past 24 months. A byproduct of this is dramatically increased M&A or merger objection lawsuits. In 2010, 341 M&A lawsuits were filed; a 78.5% increase from 2009 and a colossal 847% increase over such suits filed in 2008, according to Securities Class Action Services. Allegations broadly contend that directors and officers breach their fiduciary duties to shareholders with a flawed deal process that fails to maximize shareholder value.
M&A transactions virtually guarantee plaintiff law firm interest now. The allegations are easy to make and merger objection lawsuits often produce quick settlements – with the majority going to plaintiff attorney fees. Historically, monetary settlements were small in value; however, recent cases have bucked this trend. Last month, J. Crew Group Inc. and their private equity acquirers offered a $16 million dollar settlement to shareholders in an attempt to resolve the deal objection litigation. J. Crew’s settlement represents an extreme example of a merger objection claim; however, many insurers are stating that seven figure settlements are becoming increasingly common. Defense costs have risen dramatically as well.
Directors and Officers Liability (D&O) Insurance is expected to defend and resolve these claims. However, insurers are pushing back in multiple ways. Insurers may only provide defense coverage for deal litigation and exclude coverage for the amount by which the deal price is increased. Their rationale is that insurers should not pay for the amount the deal value was insufficient. Further, buyers are increasingly added as additional defendants alleged to have aided or abetted the flawed deal. Coverage obstacles may arise for the buyer, as historically D&O has not been designed for this fairly new type of allegation.
M&A claims often used to resolve below the D&O insurance policy’s retentions but the trends are changing with significant increases in costs. Insurers have begun to react to the uptick in litigation activity and cost by narrowing the scope of coverage. Some insurers are requiring a separate and significantly higher retention for merger objection claims while other carriers are reviewing the coverage afforded under the policy definition of loss.
The coverage scope and retentions relating to M&A claims is negotiable. Any firm that is an acquirer or a potential target of M&A should emphasize this coverage – it might be tested.
