Home > Mission 1: Businesswire > Wall Street Journal Calls Out Shareholder Class Action Firms

Wall Street Journal Calls Out Shareholder Class Action Firms

The Wall Street Journal has now picked up on my story, calling out shareholder class action firms for their frivolous class action suits that follow almost every merger announcment. Below is an article written by Dionne Searcy and Ashby Jones published in the Wall Street Journal today. While Searcy and Jones still haven’t figured out that the source of these firms’ ability to start these lawsuits is their ability to use Businesswire.com to publish press releases in order to sign up unsuspecting shareholders, at least this story is finally starting to get the attention they deserve.

The mergers-and-acquisitions market is heating up again, but a new raft of lawsuits claiming shareholders are being shortchanged threatens to complicate and increase the cost of the transactions.

Investors are filing an ever-increasing number of lawsuits against corporations embarking on deals, statistics show. The number of lawsuits filed in state and federal courts has risen from 36 in 2008 to 191 in 2009 and 216 in the first 10 months of 2010, according to Rockville, Md., research firm Securities Class Action Services.

In the hours following the revelation of a deal involving a publicly traded company, plaintiffs’ firms announce investigations into the matter, soliciting clients to join lawsuits seeking class-action status and challenging either the prices or the terms of the deal as unfair to shareholders.

The lawsuits, sometimes called “strike” suits by critics, have long been in existence and they rarely, if ever, scuttle deals. They occasionally lead to benefits for shareholders. They have mushroomed, legal experts say, partly because the practice has proven lucrative for plaintiffs’ attorneys who know that companies are eager to be rid of litigation and have been settling quickly.

“It is virtually guaranteed,” said Robert Brownlie, a San Diego-based attorney who has defended corporations from the suits. Mr. Brownlie, co-chair of DLA Piper LLP’s securities litigaton practice, estimates the suits now consume a quarter of his practice.

The lawsuits sometimes hit the docket before the official paperwork on the deal has even been filed with the Securities and Exchange Commission.

“Plaintiffs know they’re going to be able to wrangle a settlement out of the company so a deal will go through,” said Michael Perino, a law professor at St. John’s University in New York. “The company knows a suit will be on the way so maybe they’ll set aside extra money in anticipation. It all seems like an elaborate kabuki dance.”

On Jan. 5, less than 24 hours after Qualcomm Inc. revealed a $3.1 billion proposed acquisition of Atheros Communications Inc., 10 plaintiffs’ firms announced that they claimed to be looking into the fairness of the deal on behalf of the companies’ shareholders. “Qualcomm may be underpaying for Atheros, thus unlawfully harming Atheros shareholders,” read one such news release.

Plaintiffs’ lawyers—and even defense attorneys—say that some of the suits can do shareholders some good. For instance, a lawsuit that held up the proposed acquisition of Amicas Inc. by Thoma Bravo LLC in 2009 helped enable a third party, Merge Healthcare Inc., to make a higher unsolicited bid for Amicas.

But some critics say that the lawsuits have gotten out of hand—which has oddly been fueled by defense attorneys’ willingness to settle.

Sometimes the only beneficiaries of the settlements are plaintiffs’ attorneys, who collect fees of about $400,000 in an average case, according to several defense attorneys who have knowledge of numerous legal settlements.

“It’s a lucrative area of the law,” said Greg Nespole, a partner at New York law firm Wolf Haldenstein Adler Freeman & Herz LLP, adding that new firms were catching on.

“The company wants to get the deal done quickly,” said Thomas Sabatino, the former general counsel at both UAL Corp. and Schering-Plough Corp. “You’ve worked very hard to reach an agreement and the last thing you want is to get hung up on one of these suits.” Mr. Sabatino said his instinct was to fight such suits, but that some plaintiffs firms’ efforts to earn a fee often stood in the way of the deal moving forward. “So you resolve them as best you can,” he said.

Both Merck & Co.’s acquisition of Schering-Plough in 2009 and UAL’s merger with Continental Airlines Inc. in 2010 spawned shareholder litigation, which Mr. Sabatino pushed to settle quickly.

Plus, settlements can often be had for cheap. In the context of a multimillion-dollar or billion-dollar deal, with its steep underwriting and legal fees, another few hundred thousand dollars to a plaintiffs’ lawyer is, “a rounding error,” says Jeffrey Rudman, a defense lawyer at WilmerHale in Boston.

Some lawyers say that in recent months that judges on the Delaware Chancery Court, a specialized court that hears volumes of cases involving corporations, have grown more skeptical of the suits.

Last month, during a hearing involving a shareholder suit concerning a merger between two radiology companies, one of the judges, Delaware Vice Chancellor J. Travis Laster, criticized these suits, saying that “a lot of these sue-on-every-deal cases” are “worthless” and “all a bunch of movement for nothing,” according to a transcript of the hearing.

But in a March ruling in a shareholder lawsuit concerning a proposed MacAndrews & Forbes merger with Revlon Inc., Vice Chancellor Laster said that such lawsuits weren’t always fruitless.

“Stockholder plaintiffs can and do achieve meaningful results,” he said. “But it requires effort.”

Vice Chancellor Laster, who didn’t respond to a request for comment, has a nickname for the plaintiffs’ firms who take the cases: “frequent filers.” Among them he lists New York firms Wolf Popper LLP and Abbey Spanier Rodd & Abrams.LLP.

“There are firms that file more than we do,” said Carl Stine, a partner at Wolf Popper. A spokewoman for Abbey Spanier didn’t return calls for comment.

Lawyers in turn have been filing the suits in state courts where they think they may be able to find an unsuspecting judge who won’t see the harm in holding up a deal while the matter works its way through court. Edward Welch, a defense lawyer at Skadden, Arps, Slate, Meagher & Flom LLP in Wilmington, Del., said some companies are putting provisions into their corporate charters dictating that all “fiduciary litigation” must be tried in Delaware.

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