Strike Suits on the Rise

One of the many side effects of the financial crisis was a decrease in the mergers-and-acquisitions market.  As the economy begins to rebound, so does M&A activity and, along with it, strike suits.  In the WSJ today there was an article on how the number of investor lawsuits has increase dramatically since 2008.  The article goes on to suggest that strike suits have caused this increase and that they are playing a costly role in M&A activity.

Strike suits are typically frivolous claims that investors bring, not necessarily because they have suffered a loss, but because of a settlement’s potential value.  In the case of an M&A transaction, management will announce a deal.  Investors will then file a suit alleging that management did not fulfill its fiduciary duty of care in arranging the transaction.  Due to litigation costs and the chance that a lawsuit would kill the deal, the company will settle with the plaintiff investors, regardless of the merits of the case.  Often the settlements correspond more to the company’s insurance coverage than to any potential damages plaintiffs may have suffered.

The big issue with strike suits is that shareholders other than those bringing the suit bear their costs.  Often the shareholders bringing the suit are no longer current shareholders.  When the settlement is made, the costs are passed along to current shareholders through the corporate system.  

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