When it comes to M&A, dealmakers should be aware of several new trends in 2014. A recent webinar by The Deal, “Trends in M&A Deal Terms and Tactics,” focuses on two such trends from Delaware courts that may affect acquirers in all jurisdictions.
The first development is preventing multi-jurisdictional litigation. The webinar panel recommended the bylaws of a new or merged company contain a provision defining in which jurisdiction any litigation concerning internal matters or competition between shareholders occurs. Without such a stipulation, multiple litigations are possible in parallel courts on the same issues— for example, in a Delaware court and a Louisiana court. This increases judicial risks: arguments heard in one court can impact the other, prolong fights and raise uncertainty. By-law provisions defining a litigation jurisdiction have recently been upheld by courts in Delaware.
The second trend is a rise in shareholder plaintiffs claiming unfair deal appraisal. Investors who believe a deal is undervalued become shareholders of the seller before the deal closes. Then they sue, claiming the deal was undervalued and demanding a court appraisal. Since courts have historically given suing shareholders either cash payments or a revision of the “fair value” this is a tails-I-win-heads-you-lose dynamic.
While this is not a mass phenomenon, courts are becoming increasingly alarmed — particularly in Delaware. To curb this type of M&A litigation, courts are demanding transparency on the finances, timing and strategy driving both buyer and seller in the acquisition. Alternatively, fast moving M&A firms simply cut out-of-court settlements with these shareholders to avoid litigation.
What This Means for You
The two trends we’ve looked at here illustrate an important point. If you’re considering deals in 2014 you should recognize that mergers and acquisitions often involve intricate legal issues. It’s essential to consult experienced advisors and lawyers who are up to date on current issues in M&A and who also understand the strategic rationale behind your purchase. Without mastery of the technical challenges—and there are many more than we’ve touched on here—your deal faces legal risks. And without a grasp of the big picture, you can easily end up with a transaction that’s legally flawless, but loses you money in the long run. Of all business activities, M&A is a team sport. With the right players at your side, you can look forward to a major win.