Top 7 Ways to Avoid Post-Closing Merger Litigation

Not all corporate mergers and acquisitions are amicable arrangements; most notably, the hostile takeover. There are various types of mergers and acquisitions in California. Even merger discussions that begin amicably may result in a perceivably unfair closing agreement, triggering expensive post-closing litigation. Oral promises may never translate into a written contract or diluted shareholders may protest. No matter the reason, California business litigation is often complex, time-consuming, and expensive.

The oldest and wisest way of avoiding costly post-closing M&A litigation is by anticipating and planning for the same. The experienced business litigation and M&A attorneys at Structure Law Group, LLP are familiar with the most common areas of post-closing M&A litigation and may help you avoid or greatly reduce the cost of business litigation.

Most Common Post-Closing Merger Lawsuits

Understanding the most common types of post-closing merger litigation can help you plan to avoid the same. Shareholder lawsuits account for the majority of M&A litigation, and academic studies indicate that the following types of mergers often lead to post-closing business litigation:

• High-value mergers,
• Hostile takeovers and offers,
• Offers with a high percentage of cash financing,
• Controlling shareholder squeeze-outs,
• Significant increases in post-closing takeover premiums, and
• Offers with target termination fee provisions.

Post-closing merger litigation has been referred to as “litigation-driven second-guessing” while the ink dries on the closing agreements. Shareholders often questioned the sufficiency of mandatory disclosures or claimed they were coerced into agreeing to the merger.

Seven Ways to Avoid Post-Closing Merger Litigation

Litigators and scholars who have studied post-closing merger trends recommend businesses take the following precautionary steps to avoid or greatly reduce the cost of post-closing merger litigation:

1. Consider increasing the amount the acquiring company will distribute to the shareholders of the acquired company – financial gain is often the motive behind post-merger litigation. Structuring the deal to ensure the acquired shareholders are financially satisfied can preempt most post-closing merger litigation.
2. Clearly identify potential bona fide plaintiffs post-closing so litigation brought by “figurehead” plaintiffs or those with no real financial stake can be easily dismissed.
3. Agree to additional disclosures in the proxy statement.
4. If able, contractually limit the remedies available for any post-merger claims to a post-merger appraisal of shares.
5. Contractually limit the class of shareholders entitled to bring post-merger litigation to those who voted “no” to the merger. Delaware, which is the leading jurisdiction for business litigation in the United States, has held that contractual provisions barring common stockholders from exercising their post-merger appraisal rights are valid with voluntary consent and consideration.
6. Inform every shareholder in writing of the specific provisions of the merger, including disclosures that may not be required by law. This helps limit non-disclosure claims of dissenting shareholders.
7. Avoid “extra-contractual representations,” i.e., promises made by the buyer to the seller that do not appear in the written contract, and ensure you have a clear “anti-reliance” clause beyond standard merger-clause language.

Contact a San Jose Business Litigation and M&A Attorney Today

Every acquisition is different, and as such, different remedies should be employed to avoid post-merger litigation. Avoid costly post-merger litigation by scheduling your free business merger consultation with Structure Law Group, LLP’s premier California business litigation attorneys. Call our San Jose office today at 408-441-7500 or contact us online today.