Much has been written recently (including on this blog)
about the growing prevalence of M&A related litigation. These lawsuits,
typically launched by the target company shareholders, are filed shortly after
a merger announcement and usually object to some aspect of the proposed merger
or of the merger-related disclosure. But the merger objection lawsuit is not
the only kind of lawsuit that mergers can produce - there is also the kind of
lawsuit that can arise post-merger when, it is alleged, the merger was not
In a recent example of this second kind of merger
lawsuit, on May 2, 2012, plaintiffs filed a shareholder class action lawsuit in
the Northern District of Illinois against Allscripts Healthcare Solutions and
two of its officers. Allscripts is, according to the
complaint, the "corporate result" of the merger of Allscripts-Misys
Healthcare Solutions and Eclipsys Corporation, which was announced on June 9,
The complaint references the company's April 26, 2012
filing on Form 8-K (here),
in which the company "shocked the market" by reporting earnings sharply lower
than guidance, as well as the termination of the Chairman of the company's
board of directors; the resignations of three other directors; and the
resignation of the company's CFO. According to the 8-K, the termination and
resignations followed board discussions regarding the leadership of the
company. The complaint alleges that in reaction to the news the company's share
price dropped sharply.
According to plaintiff's counsel's May 2, 2012 press
the complaint alleges that during the class period:
Allscripts concealed that: (a) the process of developing
a unified product offering after the Merger had suffered debilitating setbacks,
including major undisclosed schisms among the most senior levels of the
Company, which ultimately resulted in the loss of key personnel and harmful
upheaval in Company leadership; (b) a material portion of Allscripts' revenue
and net income was predicated on the successful integration of these systems,
and substantial business relationships had been destroyed by the Company's
inability to make material progress in this area; and (c) as a result of the
foregoing, Allscripts lacked a reasonable basis for its claims of progress in
post-Merger integration, sound operations, profitable results, and continued
This latest lawsuit exemplifies the second type of
merger-related lawsuit, typically filed post-merger and typically alleging that
the merger did not live up to expectations. Perhaps the highest profile example
of this type of lawsuit is the litigation filed in July
2002 in the wake of the failed AOL Time Warner merger. That litigation
ultimately resulted in a settlement of $2.5 billion (not to mention extensive
additional opt-out settlements), which is the seventh largest
securities class action lawsuit settlement of all time.
Another high-profile case of this same type is the lawsuit that was filed in
2000 following the December 1998 merger transaction that led to the
formation of Daimler Chrysler. That case ultimately settled for $300 million.
Nor are high-profile mergers the only types of
transactions that can produce this type of merger-related litigation. For
example, in September 2011, shareholders filed a securities class action
in the Northern District of California against Equinix and certain of its directors
and officers, in which the plaintiffs disclosed that the company was having
difficult with the integration of Switch & Data Facilities Company,
which Equinix had acquired in April 2010. (To be sure, in March 2012, the court
granted the defendants' motion to dismiss, albeit with leave to
My point here is that the merger objection cases are not
the only type of litigation that mergers and acquisitions activity can
generate. As these examples show, there is also the possibility that to the
extent the merger does not live up to expectations (or rather - allegedly
does not live up to expectations) there could be post-merger litigation as
well. These post-merger suits may either allege (as was the case in the Daimler
Chrysler litigation) that the merger related documents contained
misrepresentations, or that the company made misrepresentations regarding its
post-merger operations or merger-related integration (as was the case in the
Equinix case and in the recently filed Allscropts case). At some level it is
hardly surprising that litigation might arise post-merger from time to time,
given that - depending
on who you ask - "mergers have a failure rate of anywhere between 50 and 85
Indeed the possibility of a lawsuit alleging that the
merger did not live up to expectations is itself not the only type of
post-merger litigation that can arise. Another variant that can sometimes arise
is the post-merger lawsuit alleging that the surviving company failed to
properly account for the transaction or to properly present the financials of
the combined companies. An example of this latter type is the July 2011 lawsuit
filed against JBI, Inc. and certain of its directors and officers, in which
the plaintiff alleged that the company did not properly account for certain
media credits it had acquired in connection with an acquisition transaction.
All of which serves to underscore a point which has long
been known to D&O underwriters - that is, the mergers and acquisitions
transactions provide context out of which litigation sometimes (perhaps
frequently) arises. The recent rise in merger objection litigation has
certainly amplified this point. But as the examples in this blog post
demonstrate, there are other types of lawsuits beyond the merger objection
cases that can arise in connection with or following a merger transaction.
Are We There Yet?: One
of the huge by-products of the July 2010 enactment of The Dodd-Frank Act is the
huge rulemaking burden that the Act imposed on a variety of federal agencies.
As I have noted in a prior post (here),
the agencies have been laboring under the rulemaking burdens, and in many cases
have fallen far beyond their rulemaking deadlines the Act required.
Although there obviously is no joy in the exercise, the Davis Polk law firm has been diligently
tracking the agencies' rulemaking progress. In its May 2012 Dodd-Frank Progress
the law firm details the current status of the agencies' rulemaking efforts.
Among other things, the study shows that as of May 1,
2012, a total of 221 Dodd-Frank rulemaking requirement deadlines have passed.
Of those 221, 148 (67%) have been missed and 73 (33%) have been met with
finalized rules. Regulators have not yet released proposals for 21 of the 148
Of the total of 398 rulemakings that Dodd-Frank required,
108 (27.1%) have been met with finalized rules and 146 rules have been proposed
that would meet the requirement (36.7% more). Rules have not been
proposed to meet 144 (36.2%) rulemaking requirements.
The Dodd-Frank Act's rulemaking juggernaut grinds onward.
Your government at work. At the direction of Congress.
other items of interest from the world of directors & officers liability,
with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
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