Shareholder Litigation in Mergers and Acquisitions

57 Pages Posted: 9 Dec 2010 Last revised: 5 May 2017

C. N. V. Krishnan

Case Western Reserve University - Department of Banking & Finance

Ronald W. Masulis

University of New South Wales - Australian School of Business; European Corporate Governance Institute (ECGI); Financial Research Network (FIRN); National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER)

Randall S. Thomas

Vanderbilt University - Law School; European Corporate Governance Institute (ECGI)

Robert B. Thompson

Georgetown University Law Center

Date Written: August 15, 2012

Abstract

Using hand-collected data, we examine the targeting of shareholder class action lawsuits in merger & acquisition (M&A) transactions, and the associations of these lawsuits with offer completion rates and takeover premia. We find that M&A offers subject to shareholder lawsuits are completed at a significantly lower rate than offers not subject to litigation, after controlling for selection bias, different judicial standards, major offer characteristics, M&A financial and legal advisor reputations as well as industry and year fixed effects. M&A offers subject to shareholder lawsuits have significantly higher takeover premia in completed deals, after controlling for the same factors. Economically, the expected rise in takeover premia more than offsets the fall in the probability of deal completion, resulting in a positive expected gain to target shareholders. However, in general, target stock price reactions to bid announcements do not appear to fully anticipate the positive expected gain from potential litigation. We find that during a merger wave characterized by friendly single-bidder offers, shareholder litigation substitutes for the presence of a rival bidder by policing low-ball bids and forcing offer price improvement by the bidder.

Keywords: M&A Offers, Announcement Period Return, Deal completion rates, Takeover premium, Delaware lawsuits, Federal lawsuits, Controlling Shareholder Squeeze-outs, Shareholder Class Action Lawsuits, Law firm reputation, Investment bank reputation, Selection bias control, Price Revision

JEL Classification: G34

Suggested Citation

Krishnan, C. N. V. and Masulis, Ronald W. and Thomas, Randall S. and Thompson, Robert B., Shareholder Litigation in Mergers and Acquisitions (August 15, 2012). 18 Journal of Corporate Finance 1248 (2012); AFA 2012 Chicago Meetings Paper; 6th Annual Conference on Empirical Legal Studies, Northwestern Univ Law School 2011; Georgetown Law and Economics Research Paper No. 11-23; Vanderbilt Law and Economics Research Paper No. 10-37. Available at SSRN: https://ssrn.com/abstract=1722227 or http://dx.doi.org/10.2139/ssrn.1722227

C. N. V. Krishnan (Contact Author)

Case Western Reserve University - Department of Banking & Finance ( email )

10900 Euclid Ave.
PBL 363
Cleveland, OH 44106-7235
United States
216-368-2116 (Phone)

HOME PAGE: http://weatherhead.case.edu/faculty/c-n-v-krishnan

Ronald W. Masulis

University of New South Wales - Australian School of Business ( email )

Sydney, NSW 2052
Australia
612-9385-5860 (Phone)
612-9385-6347 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER) ( email )

BIZ 2 Storey 4, 04-05
1 Business Link
Singapore, 117592
Singapore

Randall S. Thomas

Vanderbilt University - Law School ( email )

131 21st Avenue South
Nashville, TN 37203-1181
United States

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Robert B. Thompson

Georgetown University Law Center ( email )

600 New Jersey Avenue, NW
Washington, DC 20001
United States
(202) 661-6591 (Phone)

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