Class-action lawyers swarm around buyout deals

2012-02-07T00:15:00Z 2012-06-15T10:51:53Z Class-action lawyers swarm around buyout dealsBY DAVID NICKLAUS • dnicklaus@post-dispatch.com > 314-340-8213 stltoday.com

When Solutia agreed to sell itself for $4.7 billion, its stock price jumped 41 percent and most investors seemed to think it was a good deal. Nine law firms are trying to convince them otherwise.

Within days of the Jan. 27 buyout announcement, each of the firms declared that it was investigating Solutia. The news releases all carried the same message: You might not be getting a fair deal, and maybe you should contact us about a lawsuit.

Nowadays, big mergers attract litigation threats as routinely as manure draws flies. When Savvis was sold to CenturyLink last year, a dozen firms announced investigations and three sued. Similarly, Smurfit-Stone Container attracted seven lawsuits when it was bought last year by Rock-Tenn Corp.

The law firms "investigating" Solutia don't claim to have any evidence of wrongdoing, and their valuation analysis is thin. Faruqi & Faruqi of New York asserts, for instance, that "at least one financial analyst has set a price target of $31 for Solutia."

That is above Eastman Chemical's offer of about $28 a share, but any seasoned investor knows that analysts aren't always right.

What these firms are doing is advertising for clients. By persuading a lot of shareholders, or a large investor like a pension fund, to become a plaintiff, a lawyer improves his or her chances of being the lead attorney in a class-action suit. The lead attorney, of course, gets the biggest fee.

"These cases do get settled, even though they may be without real merit," says John Coffee, a securities-law professor at Columbia University. "Companies would rather settle than fight, particularly when they are under a time constraint to get their merger closed."

Hillary Sale, a law professor at Washington University, says the class -action lawyers perform an important role in our financial system.

"One of the things these lawsuits do is hold boards accountable" she said. "If these private plaintiffs' attorneys weren't doing it, these decisions would go unquestioned."

Occasionally, a class-action suit does uncover abuse. Some of the biggest awards, Coffee said, come in cases where a majority shareholder forces a deal on minority shareholders.

However, he argues, many suits don't make the case that a company was sold too cheaply. "Not all shareholder litigation is fraudulent or nonmeritorious, but merger litigation is pretty weak," Coffee said.

The weak cases, he said, result in settlements where the company agrees to amend its disclosure documents, without paying any more money to shareholders.

"If you got no value, and just settle for additional disclosure, you are giving in to a kind of polite extortion," Coffee asserts.

The Smurfit-Stone cases were settled in October after the company made additional disclosures and created a "quasi-appraisal" process for disgruntled shareholders. In other words, the litigation won them the right to pursue more litigation.

The settlement notice didn't divulge the size of attorneys' fees, but they often are large in such cases. And, Coffee says, "You put a saucer of milk out for a stray cat, and you will get 30 stray cats the next week."

Melissa Zona, a Solutia spokeswoman, said Monday that the company had heard about one lawsuit but hadn't been formally served. Solutia doesn't believe that any such litigation will delay the merger with Eastman, she added.

Even so, the stray cats are gathering. The more nuisance they can create, the better are their chances of being fed.

Read more from David Nicklaus, who is the business columnist for the Post-Dispatch. On Twitter, follow him @dnickbiz and the Business section @postdispatchbiz.

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