The tide seems to be turning against lawsuits that target bank mergers.
Most bankers brace themselves for a barrage of litigation whenever they announce a deal. In most instances the lawsuits claim that a merger agreement's terms are not in the best interest of the selling institution's shareholders.
A recent decision by a Delaware court seems to have stopped some litigation in its tracks. While the case did not involve banks, the banking industry – more than 1,000 financial institutions have agreed to be sold since 2012 – could be among the biggest beneficiaries.
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As consolidation heats up, bankers are pushing back against lawsuits challenging a deal's merits. Experts say the law firms pursuing litigation are motivated by fees and often withdraw when bank lawyers use legal maneuvers to lengthen the process.
August 29 -
A rise in shareholder lawsuits following deal announcements has prompted insurers to vet clients' M&A plans and raise the deductibles banks must pay to settle claims.
March 12 -
Old Line Bancshares in Bowie, Md., agreed to disclose more information about a recent acquisition when challenged by shareholders, but it refused to pay any money. That rare resistance could embolden other banks to fight such suits harder, experts say.
November 14
"There's a lawsuit virtually every time a [public] bank merges," said Kip Weissman, a lawyer at Luse Gorman. "It's a problem. They're a nuisance and they cost money. It's a big issue."
The Delaware Supreme Court, in a case involving the sale of the jewelry retailer Zales to Signet Jewelers, ruled earlier this year that most fiduciary duty claims against a merger can be thrown out once shareholders approve the agreement. The case involved a claim that Zales' directors should have demanded a better price.
The banking industry could benefit because lawyers will no longer be able to attack a deal's terms on the basis of board negligence, industry experts said.
"That kind of claim is gone," said James Kaplan, a lawyer at Quarles & Brady. "What remains are gross deficiencies in board procedures, which affected the information that shareholders got, and thus rendered the approval of the shareholders invalid."
Still, claims of poor disclosure have also been under pressure, industry experts said. Last year, Delaware judges on at least four occasions rejected settlements that only included added disclosure and attorneys' fees. Those rulings followed research that found no evidence that disclosure settlements influence how shareholders voted on a merger.
There are signs the pace of shareholder litigation has slowed.
A study from the University of California, Berkeley found that a fifth of all corporate mergers in the fourth quarter – when court intervention began – faced shareholder litigation. That rate was down from 95% in 2014.
"There has been a crackdown on merger litigation," said Steven Davidoff Solomon, a law professor at Berkeley who co-wrote the paper. "That's a substantial drop. It's weeding out cases that were settled out for attorneys' fees and disclosures."
The pendulum is definitely swinging against shareholder plaintiffs, said Eduard Korsinsky, a founding partner of Levi & Korsinsky, a firm well known for representing such clients in merger litigation. Korsinsky, who called the Zales decision a "significant" development, said he is concerned that the ruling could discourage the pursuit of legitimate claims.
Still, Korsinsky admitted that there were lawyers who took advantage of the system by filing frivolous lawsuits without checking the merits first. That had become easier as lawyers were able to recruit plaintiffs through online means.
"You do have attorneys that don't really spend the time and effort and resources on vetting the cases and bringing decent cases," Korsinsky said. "It started turning into a fee grab, and that's where the courts are right to be concerned."
Banks interested in consolidation shouldn't celebrate just yet, industry experts warned.
The Zales decision isn't binding in other legal jurisdictions, though many states follow decisions made in Delaware, where a majority of companies are incorporated. The state's courts also have a reputation for treating management teams and boards fairly.
Plaintiffs' attorneys could also find new ways to attack mergers.
"It's how these attorneys feed their kids," said Greyson Tuck, a board member at the law firm Gerrish McCreary Smith. "I don't believe these challenges … will go away anytime soon."
There are ways that selling institutions can help protect themselves from litigation, industry experts said. Thorough disclosure is always a good start.
Management teams also need to show that there was an independent review process and that appropriate due diligence was completed, said Shanda Davis, a product manager at Travelers who is responsible for directors and officers insurance.
"Given the frequency of these lawsuits, if you're a large public company then you have exposure to this," Davis said. "You need to show that it was a fair process."
Anyone looking at a deal should work with their lawyers to make sure they are prepared for possible litigation, said Frank Sorrentino, chairman and CEO of ConnectOne Bancorp in Englewood Cliffs, N.J.
Sorrentino successfully
"I would assume the moment you hit the send button on your merger announcement that you will receive a notice of a lawsuit," Sorrentino said. "Having a defensive way of thinking prior to the announcement is part of the transaction."
