OK, assume Company X fights the lawsuit and wins. It costs them $5M in legal fees, discovery costs and wasted manpower to do that and they had the chance to settle for $2M. But now the company is worth $5M less. I think this would be a much clearer case for arguing that management failed in their fiduciary duties.

As I said, it is in EVERYONE’S best interest for everyone to fight but in no ONE company’s interest to do so. This is one of the places where I see value in the government stepping in. If the rules were such the the winner of a lawsuit did not suffer harm, then every company has an incentive to defend itself rather than surrender to legalized extortion.

I think we agree on the GOAL(fighting back). I just think we need to give corporations a better reason than ‘its the best solution long term for everyone that you suffer now’. The reason I suggest giving is Loser Pays.

So my point is that the message would go beyond just that particular M&A case. But as for some of the nuances DEM is addressing, they are above my pay grade.

This may be true as applied to routine lawsuits like slip-and-falls at Wal-Mart, but companies don’t engage in mergers everyday. More specifically, the target company (the one being acquired) sells itself once, and that’s it. So one company cannot possibly establish the sort of “no settlement” mentality as to merger litigation that might fend off plaintiffs law firms. (The acquiror is often named in merger litigation as a mere formaility and is not the real target of the suit.)

Moreover, in the context of merger litigation, pretty much the whole ball of wax is the preliminary injunction hearing where the court either enjoins the deal or lets it close. And many companies do, in fact, go through with the PI hearing. The plaintiffs are not deterred by this because losing the PI often does not result in the court’s refusal to award a fee. If, for example, the company made some minor tweak to its proxy disclosure prior to the PI hearing, the plainitffs always take credit for it and ask for a fee award. And the court often grants it. The PI is therefore gravy.

Finally, asking a board of directors that has negotiated a large premium for its shareholders to risk an injunction for the sake of principle is a large ask. Often, the money at stake in the merger is well into the billions with shareholders standing to reap large gains if the merger closes. (I recently defended a merger where an early stage phrama company with no earnings was bought out at a 165% premium. Even that deal attracted multiple lawsuits.) If it doesn’t close, shareholders may get nothing. If the company can preserve a billion dollar deal by paying a $500k settlement, it’s a rational economic decision given the inherent risks of litigation. That is especially so when just about every deal is now the subject of multiple lawsuits in multiple jurisdictions. The plaintiffs firms are feeding off this inherent imbalance inthe defendants’ risk/reward calculus.

But that seems to be more toward the protection of OTHER peoples interests. My costly fight lowers the cost to others, not to myself. Unless I assume that we will be be merged again and that my refusal to yield would change the system.

This seems a bit like the Prisoner’s Dilemma. With the added twist that should corporations collaborate, it might be seen as conspiracy or and Antitrust violation.

@Ted – So what do you propose as a solution? I assume you have some laundry list of demands that will, as a coincidental byproduct, gut meritorious suits that recover billions annually for shareholders in service of preventing meritless suits that cost mere millions annually. I’m saying that’s a bad idea. If we have to tolerate some nuisance suits that add trivial amounts to the bottom line, it’s worth it to prevent insider interests from stealing value from shareholders. Do you want an marketplace in which investors can’t be confident that their investment won’t be sabotaged by an unfair merger? Capitalism depends upon enforceable investor rights.

You should spend some time researching plaintiff’s securities firms. It’s not like they get a call from some investor saying “the company was just bought!” and then they fire off a lawsuit hours later. These firms monitor every publicly traded company as a free service to pension funds and other large investors, and they advise those investors as the deal progresses. Once the deal is being consummated, they’ve already figured out the math on the deal, have discussed litigation with the clients, and have the complaint drafted and ready to go.

Being surprised by the timing of filing is like being surprised that states sued to declare the Affordable Care Act almost immediately after it was passed — they had ample notice of it and its details.

In terms of the analogy to doctors, if you showed me evidence “doctors now push some costly and injurious therapy on nearly every affluent patient even though a large share show no particular signs of requiring it,” I’d say that’s probably common and hard to prevent without prohibiting real, necessary medicine, and so my views are the same: it’s regrettable, but what can we do about it?

It’s similar to what happens once a practice buys a CT scan: scans ordered goes way, way, way up. I guess we could analogize that it’s a similar level of harm, too: much like how a weak case is of minimal cost to a company, a CT scan increases the risk of cancer by some very small, but not zero, amount. Would I recommend banning CT scans? Of course not, CT scans save more lives than they hurt. So my position is the same: it’s not laudable, but it’s part of the cost of an overall positive good for society.