Early on the Wednesday after Labor Day, Rochester Medical Corp. of Stewartville, Minn., announced its sale to C.R. Bard, Inc. for $20 per share, or about $262 million.
Within about four hours, Reuters was reporting that the law firm of Rigrodsky & Long had launched an “investigation” into the Rochester Medical sale. Other firms quickly followed.
If you did not know any better, you would think a scandal was unfolding. Multiple law firms all said they would be looking into whether there were breaches of fiduciary duty and other serious misdeeds.
But we do know better. If there’s a scandal, it’s what these firms were doing, not what Rochester Medical’s board did. These kinds of investigations are inevitably followed by lawsuits, and it’s gotten to the point that 93 percent of deals worth more than $100 million in 2012 drew a lawsuit, according to the consulting firm Cornerstone Research. Post-deal litigation is now so out of hand that it’s long past time for some grown-up, a senior judge or U.S. senator or member of the Securities and Exchange Commission, to put a foot down.
As for those investigations by plaintiffs’ attorneys, Peter Carter, a partner with the Minneapolis law firm Dorsey & Whitney, described them like this: “Their idea of an investigation is a Google search, honestly.”
That could explain how the five lawyers of the Rigrodsky firm could launch about three dozen more investigations just since they said they were looking into the Rochester Medical deal.
Plaintiffs’ lawyers use several arguments to talk about the value of their work, such as the policing effect on the behavior of boards considering a sale of the company. Some acknowledge that a public company’s decision to sell shouldn’t just by itself be a reason to sue.
“Before filing a lawsuit, we would check to see whether all material information has been disclosed to the shareholders and whether the company has followed proper corporate procedures as set forth by law,” Gregg Fishbein of the Minneapolis firm of Lockridge Grindal Nauen said in an e-mail. “The fact that a shareholder believes a tender offer is too low is not a sufficient reason to file a lawsuit trying to challenge that tender offer.”
But his brethren in other firms don’t appear to be as thoughtful, and the incentives are clear enough. Cornerstone found that four out of five of these suits got settled with the lawyers taking every nickel. In those cases, companies just agree to pay some fees and add information to documents prepared for shareholders who need to vote to approve the sale.
It’s these so-called “disclosure-only settlements” that appear to be particularly wasteful.
Once a suit is filed alleging that the board failed to get enough value for the company, what usually follows, Carter said, is an amended complaint. It comes after plaintiffs’ attorneys have had a chance to comb the company’s disclosure documents, looking for plausible arguments that more information should have been disclosed.
That’s what Rochester Medical agreed to do, last week announcing in a filing that it had come to an understanding with the plaintiffs’ attorneys to settle for $485,000. No shareholder will get a dime of this money.
What additional disclosures were bought by this nearly half-million-dollar expense? After 20 minutes with the original proxy statement lying alongside the five pages of additional information, it isn’t possible to name a single thing that could make a difference. Is it critical for shareholders to see a Rochester Medical forecast through fiscal 2018 of its changes in working capital?
These settlements are increasingly not covered by insurance, either, as insurance companies have figured out that these suits are about as common as snowfall in winter. And that makes sense, too: Try finding an affordable quote for car insurance when both you and the insurance company are dead certain your car is going to get banged up in an accident.
Dorsey’s Peter Carter defends these suits for corporate clients including Rochester Medical, but he declined to discuss any cases. “Every time I defend one of these I feel bad for my clients,” he said.
It’s easy to see why. One director I talked to explained that selling the company was like waiting ten years to be invited to a dance, only to be advised by counsel that it needed to get five more invitations before saying yes to one. And after sweating that whole process and making a deal, the directors got sued. Personally.
Carter said one thing that may help corporate boards is a more aggressive stance, that “if the board decides to fight, 999 times out of 1,000 they would prevail,” he said. “If the plaintiffs’ bar understood that they’re going to invest a whole lot of money in these and face a real lawsuit, I think we would see fewer of these cases.”
Being aggressive did work for FSI International, a Chaska-based firm acquired last year by Tokyo Electron. As usual, there were post-deal suits, all consolidated into one. The company has just recently settled, according to a person with direct knowledge of the situation.
Neither side’s counsel returned calls to discuss it, but the person familiar with the settlement said it gave both plaintiffs $1,000, with $40,000 to their lawyers. That’s a pittance as such things go, and almost certainly made suing FSI a money-loser.
What FSI and Tokyo Electron spent defending themselves isn’t known, but $500,000 seems like a reasonable guess. That’s a lot, but it’s about what Rochester Medical agreed to pay in its tentative settlement.
“You can’t entirely inoculate yourself from these post-deal lawsuits, which seem to be the American way,” said Peter Lombard, an investment banker and leader of Piper Jaffray & Co.’s merger and acquisition practice for technology, telecommunications and media companies.
But directors can, he said, reduce the risk of a genuine claim. One idea is to routinely review what their company may fetch in a sale and who likely buyers may be. That makes them better prepared if a deal opportunity does arise.
Lombard also would like to see, in the courts or by legislation, a higher threshold before a legal claim can be made.
“Maybe the first order of business is to get the name of the company right” in a complaint, Lombard said. “I’ve seen it where the name of the target is wrong.”
That would seem to be a reasonable place to start.
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