WILMINGTON, Del./NEW YORK, Feb 11 (Reuters Legal) - Lawyers
are pushing for a $4.5 million fee for their work for investors
challenging a corporate merger. The recovery for shareholders?
The requested fee in a lawsuit challenging Unilever NV's
$3.7 billion takeover of Alberto Culver Co is part of a cottage
industry of merger-related shareholder cases that are flooding
U.S. state courts.
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 percent
premium to its last share price, at least eight law firms said
they were investigating the transaction.
Law firm Grant & Eisenhofer filed three of the five lawsuits
spurred by the merger. On Nov. 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, which is
being acquired by private equity firm Kohlberg Kravis Roberts &
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
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 to 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."
The Alberto Culver case is In re Alberto-Culver Company
Shareholder Litigation, Delaware Chancery Court, No. 5873-VCS.
For the plaintiff shareholders: Stuart Grant, Michael Barry,
John Kairis and Christian Keeney of Grant & Eisenhofer; Mark
Lebovitch, Brett Middleton, Amy Miller and Jeremy Friedman of
Bernstein Litowitz Berger & Grossmann.
For Alberto Culver: S. Mark Hurd, A. Gilchrist Sparks III
and D. McKinley Measley of Morris, Nichols, Arsht & Tunnell;
Walter Carlson, Richard Kapnick, Kevin Pecoraro and Courtney
Rosen of Sidley Austin.
For Unilever: Brock Czeschin and Gregory Williams of
Richards, Layton & Finger; Peter Barbur, Stuart Gold and Karl
Huth of Cravath, Swaine & Moore.
(Reporting by Tom Hals and Jonathan Stempel of Reuters;
Additional reporting by Terry Baynes of Reuters Legal)