57 Pages Posted: 9 Dec 2010 Last revised: 19 Aug 2012
Date Written: August 15, 2012
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: 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). Journal of Corporate Finance, Forthcoming; 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
By Kevin Murphy