Much has been written lately about why suits objecting to a merger are so bad. The complaint is that those suits lack any merit and are filed only to get a fee for the plaintiffs bar, after a quick settlement. As evidence of this abuse, the critics point to the prevalence of merger objection suits (occurring in 90 percent of deals) and the speed with which those suits are filed soon after a merger announcement. After all, 90 percent of all mergers cannot be objectionable and a suit filed so quickly could not have followed taking the time to investigate its merits. When the suit is settled shortly after filing, with only some additional disclosures added to the proxy statement and a fee paid to the plaintiffs’ attorneys, the litigation looks suspicious. Calls for reform are made almost daily.
Why, then, are merger objection suits still so prevalent? To begin with, the actual players lack an incentive to change the system that benefits them. If the suit settles quickly and a $500,000 fee is awarded to the plaintiffs’ lawyers, they are happy. For the defendants, that cost is quite small compared to the millions involved in most mergers and the settlement usually involves what has been described as an “intergalactic” release of the director defendants from every possible claim. That certainty is worth something, as shown by the willingness of defendants to pay.
