Banks Find Success Fighting M&A Shareholder Suits

A number of bankers are going from passive to pugnacious in dealing with lawsuits tied to planned mergers. And they're winning.

Mergers frequently draw attention from a slew of shareholder rights lawyers who announce plans to investigate the financial merits of a deal before the ink had had time to dry. Historically, bankers had taken the attitude that they were better off settling such lawsuits to avoid delays, added costs or a deal's derailment.

Such settlements often included additional disclosures and agreement to pay attorneys' fees, which bankers once viewed as another cost of doing business. In the past year, however, more banks have aggressively pushed back, essentially prevailing by having judges throw out claims for attorneys' fees or, in some instances, having the suits voluntarily withdrawn.

"We were not going to allow a settlement," said Frank Sorrentino, chief executive of ConnectOne in Englewood Cliffs, N.J., which merged with Center Bancorp in June. "We are going to be in the M&A marketplace going forward, so it was important to set a mark on these sorts of suits that we will fight vigorously so they should think twice next time. We didn't acquiesce."

A handful of law firms, including Levi & Korsinsky and Faruqi & Faruqi, have carved out a niche making money from M&A litigation. Such firms issue press releases announcing probes, often seeking out a shareholder to serve as a lead plaintiff. In other instances, investors essentially serve as professional shareholder plaintiffs.

Calls to Faruqi & Faruqi and Levi & Korsinsky were not returned.

For the most part, bankers view such litigation as a frivolous means to pad the pockets of the attorney involved.

"I can't speak for all suits," Sorrentino said. "I'm sure somewhere there is a legitimate suit, but in general, the vast majority is just egregious."

ConnectOne engaged Windels Marx Lane & Mittendorf to help it fight its lawsuit.

Windels Marx knew the landscape. Last year, it represented Somerset Hills Bancorp in Bernardsville, N.J., in a lawsuit tied to its sale to Lakeland Bancorp in Oak Ridge, N.J. The banks settled with the plaintiffs for added disclosure, but reserved the right to fight the fee in the Superior Court of New Jersey.

A judge had planned to hear the case, but Levi & Korsinsky agreed to settle for "nuisance value" of $52,500, far short of the $400,000 they initially sought.

Windels Marx developed a plan during the case to fight such lawsuits, said Clark Alpert, a partner at the law firm. As part of the plan, lawyers would serve a frivolous litigation letter to the court, file a motion to dismiss and try to schedule depositions with the lead plaintiff.

Alpert, along with fellow partner Robert Schwartz, used those tactics representing ConnectOne, and the suits were voluntarily withdrawn without any sort of settlement.

The firm followed the same playbook when it represented 1st United Bancorp in Boca Raton, Fla., which had agreed to sell itself to Valley National Bancorp in Wayne, N.J., securing another voluntary dismissal.

"The cocktail [of legal maneuvers] has made everyone so far voluntarily dismiss in the last two cases," Alpert said. Plaintiffs' law firms want the fastest path to a settlement, so actions that make it harder and more time-consuming also make the litigation less lucrative. In addition, shareholder rights lawyers want to avoid going to court because an unfavorable judgment could set a precedent at a time when judges are turning increasingly negative on such litigation.

"In court, we would blow it apart and show that many of these class-action suits are not sincere, diligently investigated lawsuits and are intended primarily to obtain a fee," Alpert said. "A decisive judicial opinion could destroy that industry."

Besides the Lakeland-Somerset deal, at least one other recent deal did play out in court. In November, a Maryland judge ruled that Old Line Bancshares in Bowie, Md., did not have to cover Levi & Korsinsky's legal fees in a lawsuit tied to its purchase of WSB Holdings. Levi & Korsinsky was seeking $400,000.

"Once you really strip these cases and get to the merits, there's not a lot of merit," said Frank Bonaventure, a partner at Ober Kaler, which represented Old Line. "I think Old Line was at the forefront of a trend of companies saying they were not going to roll over."

The outcome of that case was never published. While it makes for a good point of reference for other instances of litigation, the Old Line case doesn't carry as much value in terms of setting a precedent.

Law firm Nelson Mullins also took an aggressive position when it helped HomeTrust Bancshares get the plaintiffs to voluntarily withdraw a lawsuit challenging the Asheville, N.C., company's purchase of Jefferson Bancshares in Morristown, Tenn., without a settlement. Nelson Mullins also challenged a request for a preliminary injunction, which would have held up the deal until the lawsuit was resolved.

"You go through a series of steps to make sure [the other attorneys] recognize that they are going to have to work," said Neil Grayson, head of the financial institutions practice at Nelson Mullins. "And they would have lost a lot of their leverage without the injunction."

Grayson said he is advising buyers and sellers to disclose as much as possible in proxy statements to avoid such litigation. He represented Yadkin Financial in Elkin, N.C., in its merger with VantageSouth Bancshares in Raleigh, N.C. The $300 million deal, among the largest announced this year, closed in July without a formal challenge.

"We really focused on the issues that [shareholder rights' attorneys] typically bring claims over and tried to address those things both in structuring the merger and in the disclosures," Grayson said. "If everything is disclosed you may still get sued, but I think it improves your chances of not being sued."

Lawyers are split on calling the banks fighting back a trend, despite a handful of recent victories. Given bankers' traditionally conservative nature, Grayson and others say most executives would prefer to settle. Some lawyers, like Alpert and Scwhartz, hope more bankers will fight.

"You settle because you don't want to take on the jeopardy of having your deal delayed," Schwartz said. "Time is money, but with series of decisions we've had we hope more boards start to think, 'I can defend this claim and make it go away quickly.'"