Lawyers are pushing for a $4.5 million fee for their work for investors challenging a corporate merger. The recovery for shareholders? Probably zero.
The requested fee in a lawsuit challenging Unilever NV's $3.7 billion takeover of Alberto Culver Co (NYSE:ACV.N) is part of a cottage industry of merger-related shareholder cases that are flooding U.S. state courts.
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Plaintiffs' lawyers say the legal actions are in response to a spike in corporate mergers that are unfriendly to shareholders. Companies, they say, are agreeing to sell businesses on the cheap in deals that benefit managers who are poised to get big payouts from the transactions.
But merger-related litigation is also big business. Lawyers often put out notices just hours after takeovers are announced, seeking investors to challenge the tie-ups.
Critics say something is wrong with a system that allows lawyers to collect handsome fees even when their clients appear to see little benefit. They say many cases are settled by companies who see them as nuisances, and that courts encourage more lawsuits by being too quick to sign off on such accords.
"Are stockholders really being protected?" said Boston College Law School professor Brian Quinn. "Or are people working a system and gaining at the expense of stockholders?"
Within two days after beauty products company Alberto Culver agreed last September to the Unilever takeover at a 19% premium to its last share price, at least eight law firms said they were investigating the transaction.
Law firm Grant & Eisenhofer PA filed three of the five lawsuits spurred by the merger. On November 29, it announced a settlement on behalf of shareholders of Melrose Park, Illinois-based Alberto.
Alberto was forced to offer incentives for another bidder, cut the breakup fee to call off the merger to $100 million from $125 million and allow more time for interested parties to have a look at the company, said Grant & Eisenhofer Managing Director Stuart Grant.
Still the case, which he described as a "knock-down drag out" fight, did not result in a higher price for Alberto.
"I can't deliver another bidder," Grant said. "I can only create an environment that will allow another bidder to come in. So when you say the shareholders didn't get any money, I can't deliver that."
The law firm requested a $4.5 million fee plus $101,000 for costs, which is subject to approval by Delaware's Chancery Court and will be paid by Alberto.
Grant's firm has won praise from Delaware judges, including recently, when it won a plum job of leading a handful of lawsuits against the board of Del Monte Foods Co (NYSE:DLM), which is being acquired by private equity firm Kohlberg Kravis Roberts & Co (NYSE:KKR).
LAWSUITS ON THE RISE
Other law firms -- many of them -- want a piece of the pie.
Lawsuits challenging mergers tripled to 335 in 2010 from 107 just three years earlier even as deal volume dropped, according to Advisen, a provider of research to insurers. In 2003, there were just 18 such cases.
Meanwhile, the average size of companies targeted is down by more than half from 2006, to $509 million, Advisen said.
Almost all cases land in state rather than federal courts because plaintiffs see them as friendlier to their cause. Many go to Delaware Chancery Court, but they can be filed almost anywhere.
Settlements often come fast, and plaintiffs' lawyers share in the spoils -- $500,000 in a typical lawsuit, Advisen said.
"The real problem, I think, is in cases where lawyers win a few extra sentences of disclosure and walk away with $1 million of fees," said Ted Frank, who founded the Center for Class Action Fairness and often challenges proposed settlements.
Lawyers and researchers say the proliferation of lawsuits reflects increased competition among firms."There are some bottom feeders on the plaintiffs' side," said Adam Savett, a director at the Claims Compensation Bureau LLC, which monitors class-action claims for investors. "Their modus operandi is throw up a lot of stuff on the wall and try to get a quick settlement, and move on."
REARRANGING DECK CHAIRS
Typically, an individual or institutional investor sues a target company or its directors, seeking class-action status and alleging a breach of fiduciary duty to shareholders.
This could involve failing to shop the company to enough suitors, accepting a lower price than some analysts considered fair value, or selling when the stock is unusually depressed.
Often a lawsuit seeks added disclosures about how a transaction came together, rather than monetary damages.
Corporate lawyers who defend such lawsuits are also targets of critics for being too ready to resolve them.
"Defense lawyers benefit from this game," Travis Laster, a vice chancellor in Delaware Chancery Court, said at a December hearing. "They get to bill hours without any meaningful reputational risk from a loss. They then get to get a cheap settlement for their client. Disclosures are cheap."
Frank, of the Center for Class Action Fairness, said it was up to judges decide if these settlements have much benefit.
"Judges should consider whether these provisions actually create value for shareholders," he said, "or amount to a rearranging of the deck chairs to create the illusion of value to justify attorneys' fees."