Settling Investor Lawsuits Becoming an Expected M&A Cost

Beach Business Bank quickly became the subject of unwanted attention after it agreed last summer to sell to First PacTrust Bancorp.

The same day that the deal was unveiled, Glancy, Binkow & Goldberg LLP said it would launch an investigation into possible breach of fiduciary duty by the seller's board. The law firm was intent to find out if directors had adequately shopped the Manhattan Beach, Calif., bank.

First PacTrust disclosed more information. Last week, Beach Business announced a proposed settlement that won't increase the consideration for shareholders but will cover up to $150,000 of the law firm's legal fees.

Such investigations have become expected, popping up anytime a deal is announced, often before the official documents are filed with regulators. Bankers say the firms are merely throwing up a needless toll-booth on the road to consolidation.

"These suits increase the cost of M&A as a select class of attorneys seeks to use the law in a somewhat twisted manner to generate fees for their firms," said Greg Mitchell, president and chief executive of First PacTrust Bancorp in Chula Vista, Calif.. "There is limited to no benefit for the shareholders."

Banking lawyers say this type of litigation used to be reserved for the biggest acquisitions before the economic downturn of the last several years. Now, as consolidation across all sectors makes a tepid rebound, such lawsuits are everywhere.

"This kind of litigation used to be rare, but now we see them with big deals and small deals. Maybe they are just not as busy as they were before," said Noel M. Gruber, a lawyer at BuckleySandler LLP in Washington. "These press releases are basically fishing expeditions. They announced these investigations sometimes well before" the deal is fully disclosed.

There are a handful of law firms that specialize in this particular type of litigation. None returned calls for comment.

Since the lawsuits are structured as class-action litigation, firms must find investors willing to sign on as plaintiffs. Observers say that is easy; there are always shareholders who feel short-changed. Volatility in recent years could expand the pool of shareholders who feel aggrieved.

"There are still people out there who have not recognized the fact that we are not in the 1990s or early 2000s," Gruber said. "They might be woo-able."

Beach Business shareholders are set to receive $9.07 a share in a cash-and-stock deal priced at 1.19% of its tangible book value. That pricing is about average for bank deals announced in 2011.

The banks agreed to settle the lawsuit "to avoid costly litigation and reduce the risk of any delay to the completion of the merger" they said in an amendment to its deal prospectus issued late last year.

Last year, Abington Bancorp Inc. in Jenkintown, Pa., made a similar declaration in settling a shareholder lawsuit that arose from its sale to Susquehanna Bancshares Inc., which has since closed. In April, Abington agreed to add more disclosure and to cover up to $250,000 in attorneys' fees.

Selling banks agree to these settlements begrudgingly. On background, several bankers let expletives fly in describing the lawyers and the lawsuits they bring.

"There's nothing you can do about it. You take the fire and make the best deal you can out of it," said a banker who settled such a case and asked not to be named. "If you're a director, you have to do what is best for your shareholders and we feel that we negotiated a fair and win/win situation for both sides and we still got sued."

David Baris, also a lawyer at BuckleySandler, said that while quick settlements are likely the goal of the law firms, it is the best course of action. "If it gets to litigation, well, litigation is like war. The outcome could seem clear, but then things could get foggy," he said. "Sometimes it is just best to pay the bounty."

Still, there are times when investors file lawsuits because they feel a deal is not in their best interest. Last week holders of trust-preferred securities blocked BankAtlantic Bancorp's planned sale of its healthy operations to BB&T Corp.

Investment bankers say the litigation is bothersome but shouldn't be deter acquisitions.

"Our sense is that in almost all cases, board members of these banks are taking their fiduciary duties very seriously, hire experienced advisors and attorneys, and follow prudent corporate governance," said Charlie Crowley, a managing director of Paragon Capital Group LLC, a Cleveland investment bank. "But what's the real effect on M&A? Not too much, I think. It is mostly a nuisance."

Buyers and sellers should be prepared for outside scrutiny.

"We always tell boards that ... they should expect that people will be looking closely at the transaction," said Brian R. Sterling, principal and co-head of investment banking at Sandler O'Neill & Partners LP. "It is not going to stop them from being sued, but so long as they've exercised their fiduciary responsibilities in an appropriate manner they should be fine."