Electronic copy available at: http://ssrn.com/abstract=1722227

Litigation in Mergers and Acquisitions

C.N.V. Krishnan

Weatherhead School of Management, Case Western Reserve University

216.368.2116 cnk2@case.edu

Ronald W. Masulis

Australian School of Business, University of New South Wales,

615.322.3687 ron.masulis@owen.vanderbilt.edu

Randall S. Thomas

Vanderbilt University Law School 615.343.3814

Randall.Thomas@Vanderbilt.edu

Robert B. Thompson

Georgetown University Law Center 202.661.6591

thompson@law.georgetown.edu

September 25, 2011

We thank Ola Bengtsson, Steve Choi, Chancellor Leo Strine and Vice-Chancellor J. Travis Laster of the Delaware Chancery Court, and the participants at faculty workshops at George Washington School of Law, Notre Dame Law School, University of Illinois Urbana Champaign Law School, University of Michigan Business School, Vanderbilt Law School, Washington University School of Law, and House of Finance, Goethe University, for their helpful comments.

Electronic copy available at: http://ssrn.com/abstract=1722227

Litigation in Mergers and Acquisitions

ABSTRACT:

Using hand-collected data, we examine the targeting of lawsuits in M&A transactions, the effect

of these suits on offer completion rates and takeover premiums, and the factors that lead to

positive settlement outcomes in these cases. Shareholder lawsuits form the vast majority of all

lawsuits. We find that M&A offers that are subject to lawsuits are completed at a significantly

lower rate than offers that are not subject to litigation, after controlling for selection bias, and for

offer features, M&A financial and legal advisor reputation as well as industry and time fixed

effects. However, litigation significantly increases the takeover premium in deals that are

completed. Economically, the expected rise in the takeover premium more than offsets the fall

in the probability of deal completion, so there is a rise in the expected takeover premium paid in

offers that are subject to pre-deal-completion litigation. Examining the different types of

lawsuits, suits challenging controlling shareholder squeeze-outs are significantly more likely to

lead to settlement and the payment of cash settlements. Target lawsuits, generally designed to

impede deal completion, are significantly associated with higher takeover premia in completed

deals.

Keywords: M&A Offers, Deal completion rates, Takeover premium, Lawsuits, Settlements, Delaware lawsuits, Federal lawsuits, Controlling Shareholder Squeeze-outs, MBOs, Target lawsuits, Bidder lawsuits, Shareholder lawsuits, Class Action Lawsuits, Derivative Lawsuits, Law firm reputation, Investment bank reputation, Selection bias control.

JEL Classification Code: G34

Electronic copy available at: http://ssrn.com/abstract=1722227

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1. Introduction and Motivation

Litigation is often triggered by the announcement of a merger or acquisition (M&A)

proposal. In this study, we document the types of suits triggered by M&A offers, the factors that

influence whether offers are targeted by litigation, the impact of M&A lawsuits on offer

outcomes (offer completion rates and takeover premium in completed deals), and the factors

that influence whether these cases settle for positive monetary damages.

In an M&A context, shareholders frequently sue target board of directors in class action

lawsuits alleging that directors breached their fiduciary duties to their shareholders by agreeing

to sell the company for too low a price. Alternatively, a bidder may file a case, claiming that a

target’s board of directors refused to sell the company at an advantageous price and therefore

breached its fiduciary duties to its shareholders. In a third setting, a target company sues,

alleging that a bidder has violated federal or state corporate law and thus its bid should be

enjoined by the courts. Occasionally, the government sues on antitrust or other grounds. While

scholarly research has debated the value of these lawsuits for years [Jarrell (1985), Rosenzweig

(1986), Thompson and Thomas (2004), Weiss and White (2004)], to date no comprehensive

examination of their effects on M&A transactions exists.

We start with a carefully designed, hand collected sample of 373 lawsuits related to all

M&A offers announced during the 1999-2000 period (a representative period for studying M&A

litigation, as argued in the next section), which we believe includes all significant M&A offers

and legal cases filed in this context. We find that about 12% of deals in the sample period lead to

litigation. The overwhelming majority (about 88%) of lawsuits are shareholder class action suits;

very few are bidder, target or government suits. Moreover, the vast majority of suits are

brought in state courts, with the state of Delaware receiving 52% of all cases; the other 49 states

collectively having 38% of cases and federal courts getting just under 10%.

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To describe the universe of transactions from which these litigated deals arise, we use

the Thomson Financial’s SDC Mergers and Acquisitions database to obtain a comprehensive

sample of all mergers and acquisitions transactions announced in 1999 and 2000 and to

determine key economic data about these deals. After eliminating transactions from our

analysis where we lack information on various offer characteristics or outcomes, or the names of

the investment banks and law firms associated with an offer, we have a final dataset of 2512

merger and acquisition offer announcements. Of the deals in our final sample, 299 offers

attracted litigation (“litigation offers”). As a baseline for our analysis of litigated deals, the SDC

database shows that roughly 80% of all offers in our sample are successfully completed, at an

average premium of about 37.5% of the pre-offer announcement price.

We document that: (a) federal court lawsuits, though far fewer than state court lawsuits,

attract a significantly higher proportion of bidder and target initiated litigation than state

courts. In fact, there are no target lawsuits filed in Delaware; (b) bidder and target lawsuits have

significantly lower rates of settlements than other types of lawsuits, and deals involving target

lawsuits have lower completion rates, but higher takeover premiums if completed. Target

managers typically want to either kill the deal as originally proposed or obtain a higher

premium, which will lead to both a lower completion rate and a higher average premium in

completed deals; (c) both the lawsuit settlement rate as well as the proportion of settled lawsuits

in which cash consideration is paid are higher for lawsuits challenging controlling shareholder

squeeze-outs compared to management buyouts and other types of offers, due to the more

plaintiff-friendly legal regime that applies in controlling shareholder squeeze-out situations.

Offer completion rates are also highest for controlling shareholder squeeze-out offers relative to

other M&A offer types. This is not surprising given that a controlling shareholder can

unilaterally insure that a deal is completed, simply by having a target board of directors

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approve a merger transaction and then voting its control block of shares in favor of the

transaction.

Turning to the deal characteristics that are associated with litigation, we document that

there is significantly more litigation in larger offers (as larger purchase prices raise the potential

for higher damages for plaintiffs), hostile offers (deals raising potential board entrenchment

motives), offers with target termination fee provisions (that can trigger challenges to the size of

breakup fees), offers with a higher percentage of cash financing (which often trigger strict

Revlon duties for target company boards of directors), and controlling shareholder squeeze-

outs (where dominant shareholders can influence deal terms in their favor).

To measure the effect of litigation on offer outcomes (i.e. completion rate and premiums

in deals that are completed), we control for various deal features. We find that several features

affect deal outcomes. Completion rates are significantly lower for hostile and multiple-bidder

offers, but significantly higher for offers with target termination fee provisions, tender offers,

and intra-industry offers. Takeover premiums in completed deals are significantly higher for

multiple-bidder offers and for offers with termination fees provisions.

Following Krishnan and Masulis (2011), we also control for M&A legal and financial advisor

reputations. We find that top-tier target legal advisers obtain a higher premium for their

shareholders in completed acquisitions, and are involved in deals with significantly lower

completion rates (as they help a target deploy more effective defensive tactics), than non-top tier

target law firms.1 Top-tier bidder law firms, on the other hand, are significantly more likely to

close their deals than non-top tier law firms. Given that target boards of directors generally wish

to remain independent unless they receive sufficiently high premia, while bidders want to

complete their acquisitions, these findings suggest that top-tier law firms effectively represent

their clients’ interests in mergers and acquisitions. Top tier bidder and target investment banks

1 For example, Wachtell Lipton, a top-tier law firm is credited with inventing the poison pill for a client.

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both are associated with higher deal completion rates, and are insignificantly associated with

higher takeover premium in completed deals. Thus, top tier investment bankers on both sides of

the transaction appear to be primarily concerned with completing deals, and thereby enhancing

their market shares of the M&A advisory business and their fees.

Top target (bidder) law firms are also associated with significantly fewer (more) lawsuit

settlements. However, top target and bidder law firms are both associated with a higher

probability of cash settlements of lawsuits. These findings support the premise that top target

law firms negotiate settlements primarily in strong litigation cases that support increased

payment to shareholders, while top bidder law firms are amenable to larger cash payments to

plaintiffs’ lawyers facilitate litigation settlement and deal completion.

Furthermore, it is possible that litigation appears to be associated with certain deal

outcomes simply because litigation occurs more frequently in the types of offers where the

observed outcomes are more likely. This concern is alleviated, in part, by our univariate

analyses. Deal completion rate and takeover premium in completed deals are significantly

lower for litigated offers not only in the full sample but also when we examine sub-samples of

offers segregated by other measures of offer complexity. Deal completion rate is significantly

lower for litigated offers when we examine only (a) larger offers (defined as those with above-

median offer size that are more economically meaningful often eliciting more scrutiny and

resistance), or (b) offers that involve top target law firms or top bidder law firms (offers that

may be legally complex to require top legal expertise), or (c) High Bidder-Entrenchment-Index

Offers only (bids made by the more protected bidder managements which are more likely to

indulge in unprofitable empire-building acquisitions). Likewise, takeover premium in

completed deals is significantly higher for litigated offers when we examine only (a) hostile

offers, or (b) offers entailing controlling shareholder squeezeouts (that often entail stronger legal

claims for disgruntled investors), or (c) that involve top target law firms.

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We also control for endogeneity in our multivariate analyses. However, all the offer

characteristics that we examine can be argued to be related to one or both of the deal outcome

variables, invalidating their use as instruments under the exclusion requirement. So, we

construct appropriate instruments that are based on the associations of bidder and target

industries with litigated M&A offers in the recent past.

We find that, even after controlling M&A financial and legal advisor expertise, offer features

and industry and time fixed effects, as well as for selection bias, offers subject to lawsuits are

completed at a significantly lower rate than offers not subject to litigation. Litigation is also

associated with a significant increase in takeover premiums for completed deals. Shareholder

lawsuits form the vast majority of lawsuits in our sample, supporting the premise that litigation

leads to higher bid premiums because bidders often raise their bids in order to respond to target

shareholder claims of an unacceptably low offer prices, and thereby increase target shareholder

support for the bid [Thompson and Thomas (2004)]. The economic effects of litigation is such

that while the probability of deal completion decreases by 5.8%, the takeover premium in

completed deals increases by about 9% after controlling for other offer features. Moreover, the

expected rise in the takeover premium more than offsets the fall in the probability of deal

completion, raising the expected takeover premium paid in offers that are subject to pre-deal-

completion litigation.

Examining shareholder lawsuit settlements, we find, as expected, that occasionally a

terminated deal produces gains for target shareholders, but in most cases positive settlements

only occur in completed deals. Lawsuits challenging controlling shareholder squeeze-outs have

significantly higher probabilities of settlement and expectations of producing extra cash

consideration for shareholders upon settlement. In these cases, controlling shareholders have

sufficient voting power to approve the deal, but there is also an increased likelihood of

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majority-minority shareholder conflicts of interest that can lead to low initial offer prices that

trigger litigation. We are careful to control for endogeneity in this analysis also.

The remainder of the paper is organized as follows. The next section reviews related

prior literature, Section 3 details our sample selection procedure and describes our data, Section

4 conducts extensive univariate and multivariate analyses of the associations between M&A

litigation and outcomes, and Section 5 concludes. Appendix A lists the top bidder and target

legal and financial advisors, which, as proxies for M&A financial and legal advisor expertise,

are important control variables in our analyses. Appendix B provides definitions of key

variables used in our analysis.

2. Literature Review

Mergers and acquisition transaction outcomes are the subject of numerous empirical studies

in the finance literature. Several studies have examined the effects of offer features. Offer size is

an important offer complexity measure [Servaes and Zenner (1996)]. Bidders are worse off

when bidding contests for targets occur [Bradley, Desai and Kim (1988)]. Bidders with toeholds

in target firms are better able to obtain favorable deal outcomes, including lower takeover

premia [Officer (2003)]. Stock financed deals can be more complicated transactions for a bidder

as allegations of market timing are possible [Loughran and Vijh (1997)]. Target shareholder

gains, as well as target management incentives to support a bid, can differ significantly in

tender offers as compared to mergers [Martin and McConnell (1991) and Cotter, Shivdasani and

Zenner, (1997)]. Target-payable termination fee provisions are associated with higher deal

completion rates as well as higher takeover premia [Bates and Lemmon (2003) and Officer

(2003)]. Coates and Subramanian (2000) also argue that such “lockup” provisions change bid

outcomes in terms of deal completion rates.

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In terms of how M&A advisors affect offer outcomes, Rau (2000) finds that top bidder

investment banks are associated with higher deal completion rates, while Krishnan and Masulis

(2011) find that top-tier law firms acting as M&A legal advisors significantly affect both the

offer completion rates and takeover premia, even after controlling for investment bank

reputation.

Litigation is the subject of numerous empirical studies in the law literature where the

dominant focus is on class actions arising under federal securities law. Cox and Thomas (2009),

Thomas and Thompson (2010) and Choi (2004) provide surveys of the findings reported in

earlier studies of securities fraud class actions, which have enhanced our understanding of

issues related to representative litigation. Unfortunately, M&A litigation is only incidental in

these class action litigation studies.

In the M&A field, there are two studies from the 1980s when suits by target companies

were still prevalent. Using a sample of takeover bids announced between 1962 and 1985, Jarrell

(1985) reports that target managements litigate in roughly a third of all takeover attempts.

Jarrell also examines 100 litigious target companies and finds that they remained independent

in 21 cases. Rosenzweig (1986) examines a sample of unsuccessful hostile tender offers that were

announced between 1982 and 1985, and finds that in several cases a bid is defeated either

directly or indirectly as a result of relief granted by the court.

Both studies predate the development and widespread use of Shareholder Rights Plans

(poison pills) as takeover defenses beginning in the mid-1980s. Prior to that time, experienced

takeover practitioners routinely recommended that target companies file litigation to stop or

delay unwanted tender offers [Wachtell (1979)]. The Rights Plan enables targets boards to block

unwanted offers or to force bidders to negotiate with target company boards without the need

for the target board to initiate litigation. Thus, we expect that target litigation to be a less

common defensive strategy in more recent years.

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Thompson and Thomas (2004), using a dataset of M&A litigation filed in Delaware in

1999 and 2000, find that settlements in representative shareholder litigation cases are

concentrated in transactions where a majority shareholder is squeezing out minority public

shareholders on potentially disadvantageous terms. In contrast, representative shareholder

litigation challenging hostile deals, or deals in which a white knight bidder appears, does not

result in monetary settlements that benefit target company shareholders because these deals

offer much higher average takeover premium than other change of control transactions.

Armour and Skeel (2007) use Thomson Financial’s SDC platinum M&A database in their

analysis of hostile takeover litigation in the U.S that take place between 1990 and 2005, and find

litigation in approximately 34% of these deals. Armour, Black and Cheffins (2010), using a

dataset of leveraged buyouts involving U.S. public company targets over the mid-year 1999-

2009 period, find that the proportion of cases filed in Delaware declines markedly over the

period of their study. Coates (2009) finds that litigation is significantly more frequent in deals

without termination or break fees; and mergers and acquisitions litigation reduces the

likelihood of deal completion, but that this effect does not persist once he includes time and

industry control variables. However, Coates observes that because of his reliance on data only

from Thomson Financial’s SDC M&A database, which may contain incomplete information on

mergers and acquisitions litigation, his conclusions about litigation in deals with reported break

fees “should be treated carefully.” Because we do not rely on the Thomson Financial SDC M&A

database to locate mergers and acquisitions litigation (except for the construction of our

instrumental variables) but instead hand-compile the data directly from court websites and

company securities law filings, our analysis should provide a more accurate picture of litigation

than studies that relied only on the SDC database for litigation information.

Subramanian (2007) uses a hand collected sample of non-short form freeze outs wherein

litigation challenging transactions is announced between June 19, 2001 and December 31, 2003,

9

and finds that a controlling shareholder pays less to a target company's minority shareholders,

on average, when it uses a tender offer to eliminate them rather than a merger transaction. He

further finds that this difference between tender offers and mergers increases with the size of

the controlling shareholder's pre-deal stake in the target firm.

In summary, we believe this is the first study to comprehensively examine the overall

interaction between litigation and M&A transaction outcomes.

3. Data and Descriptive Statistics

We examine litigation in M&A offers announced during the 1999-2000 period. We focus

on the 1999-2000 period for several reasons. First, the number of mergers and acquisitions

transactions that occurred during the 1999 to 2000 time is reasonably representative of the time

since 1995 [Thompson (2010)], although there have been years of fewer deals (for example 2002-

2003 and 2008-2009) and a sharp upward spike in the number of deals in 2006 and 2007. Our

two-year time period however should tell us as much as any similar interval during the 1996-

2010 period.

Second, the legal rules related to mergers and acquisitions litigation were relatively

settled during this time and have remained so since. The most influential Delaware corporate

law decisions in the mergers and acquisitions area, Weinberger, Unocal and Revlon, were

decided more than a decade earlier. The Private Securities Litigation Reform Act (PSLRA) had

been enacted in 1995 and had already changed the manner in which federal securities class

actions were litigated. An important federal statute was passed in 1998, the Securities Litigation

Uniform Standards Act of 1998, that pre-empted many state court securities fraud claims, but it

expressly exempted from its scope state court mergers and acquisitions litigation. The Sarbanes-

Oxley Act was not enacted until 2002, and in any event, had relatively little impact on mergers

and acquisitions.

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Finally, because we begin with a unique hand-collected data set on all litigation in the

Chancery Court for the State of Delaware, we focused on this period in order to assemble the

most complete data set for all mergers and acquisitions litigation. Delaware is the single most

important jurisdiction for our purposes because Delaware is the state of incorporation of a

substantial majority of all publicly traded U.S.companies, and the Delaware Chancery Court,

where all corporate cases in that state are filed, is the most important business trial court in the

country [Thompson and Thomas (2004)].

We focus on only public targets because prior research indicates that virtually all

representative shareholder litigation challenging mergers and acquisitions transactions is filed

against public companies and not against private companies [Thompson and Thomas (2004)].

Moreover, we analyze takeover premium as an important deal outcome, which is available only

for public targets. We use data relating only to U.S. target companies because we can be sure

that they must disclose information about pending mergers and acquisitions litigation in their

filings under the U.S. securities laws, whereas foreign companies usually do not make such

filings and are unlikely to voluntarily disclose the existence of pending litigation.

3.1 Litigation Cases and Variables

Our mergers and acquisitions litigation dataset was constructed in two stages. The first

stage involved collecting all mergers and acquisitions litigation filed in the Delaware Chancery

Court during 1999 and 2000 [see Thompson and Thomas (2004) for a fuller description of the

data collection process]. Delaware was one of the few states that had initiated electronic filing of

all court documents at that time (and remains one of the few jurisdictions to have done so even

today). Using this system, we compiled all complaints and other relevant documents filed for

every mergers and acquisitions case brought in the Delaware Chancery Court, and identified

the action or transaction that gave rise to the litigation. When the subject of the litigation was a

11

merger or acquisition , as most are, we tracked the deal’s progress and the litigation until each

case was resolved. Using this method, we found all mergers and acquisitions litigation that is

filed in the Delaware Chancery Court during these two years.

In the second stage of the data collection process, we expanded the Delaware data set to

include all Federal and other state court litigation challenging mergers and acquisitions

transactions. Unfortunately, most other states do not have electronic filing systems and have

many different courts in which a case can be filed. Those few state courts that do have electronic

filing, and the PACER system for federal courts, do not classify merger and acquisition cases

separately from other forms of civil litigation. As a result, we were unable to systematically use

court websites to electronically access data on mergers and acquisitions related cases as we did

in Delaware. Instead, for this portion of the sample, we relied on companies’ federally

mandated securities law filings to determine whether litigation is filed concerning their merger

and acquisition activities.

Our search procedure is to examine all target (and if necessary bidder) SEC filings on

and after the announcement date of the merger and acquisition transaction. Item 103 of

Regulation S-K, the SEC’s hub for disclosure in these situations, requires companies to

“[d]escribe briefly any material pending legal proceedings...” to which the Company is a party.

The specific forms for disclosure when one issues securities, makes a proxy solicitation, a tender

offers or periodic disclosure, incorporate this disclosure requirement. Thus, we searched all

target (and if necessary bidder) Form 10-K, Form 10-Q, Form 8-K, Form S-1, Schedule 14A,

Schedule 14D9, Schedule TO and other filings, for each merger and acquisition transaction that

occurred during the 1999-2000 sample period. If we did not find disclosures within two months

of the announcement date that litigation was filed challenging the transaction, then we coded

the transaction as not generating litigation. This is consistent with earlier research finding that

almost all mergers and acquisitions litigation is filed within one month of the first public

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announcement of the transaction (Thompson and Thomas 2004). We supplemented this search

with a Lexis-Nexis data base search for press releases or other announcements relating to the

transaction, in each case looking for announcements of deal litigation.

While we believe this to be the best search procedure that is currently possible for

identifying mergers and acquisitions litigation, we recognize that it has some limitations. First,

not all litigation must be disclosed in companies’ federal securities law filings. Materiality, as

specified in Item 103, is a legal term of art that different lawyers may interpret in different ways.

It requires the disclosure only of information if “there is a substantial likelihood that a

reasonable shareholder would consider it important” [TSC Industries, Inc. v. Northways, 426

U.S. 438 (1976)]. This standard could be interpreted by lawyers as permitting them not to

disclose mergers and acquisitions litigation in certain circumstances. Thus, we cannot be sure

that we have found all mergers and acquisitions cases filed in courts outside of Delaware

Chancery Court; only that we have found all material mergers and acquisitions cases (as

interpreted by the attorneys that prepared the companies securities law filings) in those courts.

As a check on the potential size of this bias, we estimated the likelihood of litigation for

Delaware firms and Non-Delaware firms for all deals in our sample. We find that 12.3% of all

deals involving Delaware corporations generate litigation, while 11.5% of proposed transactions

involving non-Delaware corporations lead to the filing of litigation. This difference is not

statistically significant. As we are sure that we have found all Delaware litigation, and there is

no reason a priori to believe that deals involving Delaware corporations are more likely to

generate litigation than deals involving non-Delaware firms, we view this evidence as

consistent with the claim that any potential sample bias is insignificant.

A second difficulty with our search procedure is the quantity of information that

lawyers choose to disclose about the details of a lawsuit challenging a transaction. For material

legal proceedings, Regulation S-K requires companies to disclose the name of the court in which

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the proceedings are pending, the date the case was commenced, the names of the principal

parties to the case, and a description of the facts underlying the claim and relief sought. In some

cases, companies chose to comply with this obligation by disclosing not only summaries of the

allegations of cases filed, but also copies of the actual complaints filed in the cases. In other

situations, companies disclose highly detailed information about pending litigation. However,

frequently the level of disclosure is quite incomplete when compared to the requirements of

item 103 in regulation S-K. As a result, we supplement our search of companies’ securities

filings with additional searches as described below.

Where we had sufficient information to identify the case, we enlisted the aid of the

Vanderbilt Law School’s librarians to contact each court individually to request any additional

information that we needed concerning the case and its outcome. We also wrote letters to all of

the attorneys of record that we could identify in each case, asking them to provide us with

certain pieces of missing information or documents for the cases that they were involved in. In

addition, we use a number of different databases to supplement the information that we have

on each suit. For federal cases, our primary supplemental database was the federal PACER

system. For state cases, in states that had electronic filing systems, we searched electronically for

additional information. We supplemented both of these searches with the use of the Lexis Court

Link service, which is a for-profit service that permits retrieval of dockets and certain other

information for some federal and state cases. Given these limitations, we have an initial sample

of 373 litigation cases related to M&A offers announced in our sample period.

The results of our initial search for litigation suggest several dimensions of M&A deals

that merit additional study. First, mergers and acquisitions litigation is filed in different courts

and in different forms. While the Delaware Chancery Court is reputed to be the most important

location for merger and acquisition litigation, federal district courts throughout the country and

courts in any one of the other 49 states may also be selected. One important issue that our data

14

allows us to examine is whether Delaware is different from other states in how it treats merger

and acquisition litigation. Given its preeminent position, commentators have argued over

whether it provides a more favorable forum for plaintiffs or a less favorable one. For this

reason, we track cases by the court in which they are filed. We break the sample into three

categories: Delaware Chancery Court cases; Other State Court cases, and Federal Court cases.

Second, mergers and acquisitions lawsuits can be filed as class actions, derivative

lawsuits, individual actions by either the bidder or the target company, and a few other less

common forms. Class actions and derivative lawsuits are shareholder representative litigation

in that a plaintiff's law firm chooses to pursue the matter, nominally at the request of a

particular named shareholder(s), on behalf of all shareholders that are allegedly adversely

affected by the target company's actions. The attorney's incentives in representative litigation

may be significantly different from those of the lawyers representing a bidder or target [Cox

and Thomas (2009)]. Target companies and bidder firms may also have different interests from

those of the target firm’s shareholders [Rosenzweig (1986)]. For these reasons, we examine each

form of litigation to determine whether or not there are significant differences in its impact on

the transaction. We classify cases as being in one of five categories: class action lawsuits,

derivative lawsuits, bidder lawsuits, target lawsuits, and other litigation.

A third important dimension of mergers and acquisitions litigation is whether or not it

results in a direct benefit to the shareholders of the target company. Many cases that are filed

are dismissed before reaching a judgment, either by the plaintiffs themselves or by the court at

the behest of the defendants. However, a significant portion of cases filed do result in either a

cash payment to the shareholders, or an equivalent benefit in the form of an increase in the

value of the offer for the target company [Thompson and Thomas (2004)]. We are interested in

determining the characteristics of cases that settle, and how they are influenced by the form of

the transaction or other characteristics of the deal. Furthermore, the type of transaction may

15

influence the strength of the legal claims that investors have and the price that they receive for

their shares. For example, potential conflict of interest transactions, such as controlling

shareholder squeeze-outs and management buyouts, may result in lower premiums for

departing shareholders, as well as generating stronger legal claims for disgruntled investors.

By contrast, hostile transactions may result in higher premiums in completed deals, but fewer

potential shareholder suits with cash settlements [Thompson and Thomas (2004)]. For these

reasons, we examine settlements as well as these different types of transactions separately in

our analysis.

The M&A offer outcomes we examine are: (a) Completed Offer, an indicator variable that

takes the value of 1 for completed offers and 0 otherwise, (b) Litigation, an indicator variable that

takes the value of 1 for offers in which litigation was filed, and (c) Takeover Premium, the

percentage premium paid by an acquirer in completed deals for target shares relative to the

target’s pre-offer announcement stock price one week prior to the announcement date.

We use the following variables pertaining to Litigation Offers in our analysis: (a)

Delaware Suit, an indicator variable for Delaware Chancery Court cases, (b) Other State Suit, an

indicator variable for a case filed in state court outside of Delaware, (c) Federal Suit, an indicator

variable for suits filed in federal district courts, (d) Settled, an indicator variable for settled cases

where the settlement includes some kind of affirmative relief, (e) Consideration Paid, an indicator

variable for dollar consideration paid in Settled lawsuits, including increases in deal

consideration that the parties agree are related to the settlement of the litigation, (f) Class Action,

an indicator for a Class Action law suit, (g) Derivative Action, an indicator for a derivative law

suit, (h) Target Suit, an indicator for litigation initiated by the target firm, and (i) Bidder Suit, an

indicator for litigation initiated by the bidder firm.

In Table 1A, we show that in our initial sample of 373 litigation cases, 87.6% are class

action suits, 3.5% are derivative suits and most of the remainder are individual action lawsuits.

16

About 52% of the cases are Delaware suits, 38% were filed in Other States’ courts and 10% are

Federal suits. Table 1A also shows the year by year breakout of the different types of lawsuits.

The vast majority of the lawsuits (over 95%) are filed before the offer is completed. The number

of bidder and target lawsuits is relatively small (only about 5% and 2% of all lawsuits

respectively). As noted above, the evolution of the combination of anti-takeover mechanisms

like poison pills and staggered boards already generate long delays in hostile bidders’ ability to

rapidly acquire a target company, thereby decreasing the value targets once derived from filing

deal delaying litigation. We have information on whether lawsuits were settled or dismissed for

338 of the 373 cases (the remaining cases are those where the plaintiff or defendant wins or

where no settlement information is available), and for these 338 lawsuits, about a third are

settled in court, where the proportion is similar for both years. A couple of cases went to trial,

resulting in verdicts for the plaintiff or defendant, while only a handful of cases were resolved

by dispositive legal motions.

3.2 M&A Advisor Expertise

Bidder and target financial advisors (investment banks) and legal advisors (law firms)

names, and annual league-table ranks, based on M&A advisor market shares, are taken from

Thomson Financial’s Mergers and Corporate Transactions database. Annual league table

rankings of investment advisors and legal advisors are based on the total value of all M&A

offers that a financial or legal advisor is associated with, scaled by the value of all M&A offers

occurring that year. League tables are separately calculated for bidder and target financial and

legal advisers. Each advisor is given full credit for each offer for which it provides advisory

services. Following Krishnan and Masulis (2011), we separate top tier investment banks and law

firms from other financial and legal advisors to investigate the influence of these top tier

advisors on M&A offer outcomes. Whenever at least one law firm (investment bank) associated

17

with the bidder (target) in an offer appears in the respective top-10 league tables of the year

prior to the offer announcement year (to be free of any look-ahead bias), the indicator variable,

Top Target (Bidder) Law Firm takes a value of one, and is zero otherwise. Likewise, Top Bidder

(Target) Bank is an indicator variable that takes a value of one when a bidder (target) financial

advisor is a top-10 bidder (target) investment bank in the previous year league table rankings,

and is zero otherwise.

Appendix A lists the top-10 target law firms, bidder law firms, target investment

bankers and bidder investment bankers in the order of league table rankings for each year of

our sample. The top-10 target (bidder) law firms have a combined market share of 74% (63%) in

1999 and 80% (80%) in 2000.2 The top-10 target (bidder) investment banks have a combined

market share of 80% (77.5%) in 1999 and 88% (87%) in 2000. We use the terms “top-10”, “top-

tier”, “prominent” and “more reputable” interchangeably to denote these highly ranked M&A

advisors.

3.3 Control Variables and the Final Sample

We control for the following offer characteristics that can influence M&A offer

outcomes: (a) Intra-Industry Offer, an indicator variable for when the bidder and target firms are

from the same industry (defined at the 2-digit SIC code level), (b) Offer Size, the value of the

transaction (in $ billion), as measured by the total consideration paid by the acquirer, excluding

fees and expenses [Moeller, Schlingemann and Stulz (2004)], (c) Hostile Offer, an indicator

2 We also examine results excluding specialty Delaware counsels that tend to primarily handle Delaware litigation work in corporate control contests, and are not transactional law firms per se. Based on the information in the Martindale-Hubbell database, there are 5 specialty Delaware litigation counsels in top-tier rankings. These are, following a convention of two names, Richards Layton, Morris Nichols, Young Conaway, Potter Anderson, and Morris James. Of these, two firms -- Richards Layton and Morris Nichols -- have acted as Delaware corporate law counsels in a sufficiently large number of offers in our sample and consequently have large enough M&A offer market share to qualify as lead target law firms in some offers, and as “top-10” target law firm in some years. When we exclude specialty Delaware counsels in top tier target law firm rankings, Cleary Gottlieb and Davis Polk replace Richards Layton and Morris Nichols in 1999, and Cleary Gottlieb and Fried Frank replace Richards Layton and Morris Nichols in 2000.

18

variable set equal to one for hostile bids, which also includes “Unsolicited” offers, as reported in

the SDC database [following Officer (2003)], 3 (d) Multiple-Bidder Offer, an indicator variable set

equal to one for offers involving two or more competing bidders, (e) Stock Financing, the

percentage of the total offer price that is paid in stock, or alternatively, Cash Financing, the

percentage of total offer price that is paid in cash, (f) Target Termination Fee, an indicator variable

set equal to one for offers where a termination fee is payable by a target to a bidder,4 (g) Tender

Offer, an indicator variable set equal to one for tender offers, (h) Controlling Shareholder Squeeze-

outs, an indicator for deals where the bidder has 50% or more voting power in a target firm

before the acquisition announcement, (i) MBO, an indicator for management buyout deals, (j)

Bidder Minority Stake, an indicator variable for where the bidder holds between 5% and 50% of

the target shares prior to the bid, and (k) Pre-deal-completion Litigation, an indicator variable that

takes the value of 1 for offers in which litigation was filed before the offer outcome (successful

deal completion or withdrawal) is realized.

Prior research documents that intra-industry mergers are an increasing proportion of all

M&A transactions [Andrade, Mitchell and Stafford (2001)] perhaps due to their less severe

information asymmetry problems. Economic deal complexity can be positively correlated with

the size of the transaction [Servaes and Zenner (1996)]. Larger deals are also economically more

important deals, often reflecting a bidder management’s empire building motives. Hostile bids

tend to be more difficult to complete than friendly bids.5 Offers with multiple bidders are

generally more difficult to complete than single-bidder offers [Bradley, Desai and Kim (1988)].

Stock financed deals can involve greater challenges for bidders (and their advisors) since stock-

based acquisitions can be alleged to be market timed and can be undermined by weak stock

3 Alternatively, we exclude “Unsolicited” offers while classifying “Hostile” offers and check our results. 4 Termination fee clauses in merger agreements entail a contingent payment by one party to a counter party and are triggered when the former dissolves the agreement. Thus, Target Termination Fee is payable by target firms to bidders. 5 Hostile offers represent target resistance and competition [for example, Bebchuk, Coates, and Subramanian (2002) document that, in hostile offers, targets with staggered boards are substantially more likely to remain independent with a consequent significant reduction in target shareholder returns].

19

performance [Loughran and Vijh (1997)], and thus, they can be more difficult to complete. On

the other hand, cash deals are more complex from the legal point of view. Since the

establishment of “Revlon duties” by Delaware courts in the mid-1980s, directors of target

companies considering a cash offer (and some stock offers where the deal would produce a

controlling shareholder in the combined entity) have the responsibility to obtain the highest

short-term shareholder value [Coates and Subramanian (2000)].6 Finally, bidders with toeholds

may have a greater ability to obtain favorable deal outcomes including substantial control

benefits, but toeholds are also viewed as aggressive moves by bidders that tend to antagonize

entrenched target managers and make successful deal completions more difficult [see Betton,

Eckbo and Thorburn (2009)].

Certain offer features can have important effects on bid success. Bates and Lemmon

(2003) and Officer (2003) report that target-payable termination fee provisions are associated

with higher deal completion rates as well as higher takeover premia. Coates and Subramanian

(2000) argue that such lockup provisions change deal completion rates. In contrast, tender offers

can trigger special bidder obligations and potential liability under the Williams Act [Klein and

Coffee (2000)]. Target shareholder gains are affected by target management incentives to be

acquired, which can be significantly different for hostile tender offers and friendly mergers

[Martin and McConnell (1991) and Cotter, Shivdasani and Zenner, (1997)]. Finally, bidders with

toeholds in targets may have a greater ability to obtain favorable deal outcomes, including

lower takeover premia [Officer (2003)].

Each lawsuit is associated with an M&A offer (and its features) in Thomson Financial’s

SDC Mergers and Acquisitions database. We discard offers that do not contain valid data on the

proposed deal value, deal execution outcome (completed or withdrawn), and target takeover

premia. Following Moeller, Schlingemann and Stulz (2004), we also require that the number of 6 Because of multicollinearity, we include either Stock Financing or Cash Financing variable in our regression analysis, but not both.

20

days between the announcement and completion dates is between zero and 1000. We note that

shareholder lawsuits challenging mergers are almost all filed within one month of the initial

announcement date for the transaction [Thompson and Thomas (2004)].

We also require information for each offer in our final sample on both bidder and target

characteristics, including industry classifications, whether a bid is initially friendly or hostile,

competing bidders, prior bidder equity stake in the target, use of a tender offer or a target paid

termination-fee provision, the percentage of the purchase price paid in stock and in cash, and

other offer characteristics used in our analysis, as detailed above.

After including all remaining non-litigation offers that satisfy the above data

requirements, we have 2512 distinct offers that are announced during our sample period 1999-

2000 with all the requisite information on offer characteristics, offer outcomes and offer

intermediaries (as detailed above).

Table 1B reports year-by-year as well as overall sample descriptive statistics for offers in

our final sample. Overall, about 80% of these offers are successfully completed at an average

premium of roughly 38% above the stock price 1 week before the offer. 7 The average offer size

is $1.12 billion. Less than a fifth of these offers involved at least one top-10 target legal advisor.

These descriptive statistics are not significantly different across the two years. Table 1C reports

the year-by-year as well as overall descriptive statistics for the M&A offers in our final sample

involving litigation. Interestingly, only 299 bids attract litigation, or about 12%of all transactions

proposed. Shareholder class action lawsuits form the vast majority of these lawsuits and

represent over 88% of our M&A litigation sample, while bidder lawsuits are slightly less than

4%, and target lawsuits less than 2%. The remaining cases comprise other individual actions

and derivative suits.

7 As comparison, Moeller (2005) reports an average takeover premium, computed with respect to target’s share price 6 days before offer announcement, of a little over 30%, for deals completed in the 1990s.

21

Overall, over 96% of litigation cases are Pre-deal-completion Litigation cases. About half of

these cases are filed in Delaware, with another 38% filed in other state courts, and

approximately 9% in federal court. We have information on whether the lawsuits have court

settlements, or are dismissed, for 295 out of the 299 cases: about a third of them settle with some

benefit to target shareholders, the bidder, the target, or the plaintiffs’ attorneys, while the

remaining cases are dismissed with no payment.

Table 2 details some key characteristics of the lawsuits in our sample. Table 2A reports

descriptive statistics by legal jurisdictions where the lawsuits are filed. Federal suits are far

fewer compared to state court cases, but entail a significantly higher proportion of bidder and

target firm suits. In fact, there are no target lawsuits in Delaware cases. This may reflect the fact

that targets generally try to file lawsuits in the jurisdiction where their headquarters, or major

operations, are located (almost always outside of Delaware because of its small size) in an effort

to find a friendly judge who is more likely to rule in their favor. In comparison, a large

proportion of cases filed in state courts are class actions.

Overall, more than 42% of settled cases involved the payments of monetary awards, or

increased consideration paid to target shareholders in the transaction. Lawsuit settlement rates

are not significantly different for Delaware and Federal court cases. However, the proportion of

cash settlements is significantly higher for suits settled by Delaware courts compared to those in

other state courts (noncash settlements often involve increased disclosure to shareholders

concerning the transaction). A significantly higher proportion of deals litigated in state courts

are completed, compared to cases brought in Federal court. This suggests that litigation

pursued in state courts (including Delaware) may be less of an obstacle to deal completion than

litigation pursued in federal court. Also, takeover premiums in completed deals are

significantly lower when litigation is pursued in state courts compared to federal court,

suggesting less pressure on bidders to raise the deal premium in a state court cases.

22

Table 2B reports descriptive statistics for different types of litigation. The first two rows

examine controlling-shareholder squeeze-out offers and MBOs, the next two rows look at bids

with target and bidder lawsuits, and the last two rows describe shareholder lawsuits broken

down into class actions and derivative suits. Comparing control shareholder squeeze-out offers

with MBOs, we see that while the number of lawsuits and percentage of suits settled are

relatively similar in both categories, the proportion of settlements that result in cash payments

to shareholders is significantly higher in lawsuits challenging controlling shareholder squeeze-

outs, indicating that target shareholders more frequently benefit from litigation in these cases.

This is consistent with the claim that minority shareholder legal claims are much stronger in a

controlling shareholder squeeze-out than in an MBO because courts analyze controlling

shareholder transactions using the demanding judicial scrutiny applied in conflict of interest

transactions, but treat MBOs more leniently [see Thompson and Thomas (2004)]. Also, the deal

completion rate is much higher, perhaps reflecting that a controlling shareholder can

unilaterally insure that a deal is completed by having the controlled target’s board of directors

propose a merger transaction and then voting its controlling share interest in favor of it.

Bidder and target lawsuits are far fewer in number, but have some interesting features.

These lawsuits have significantly lower rates of settlements than other types of lawsuits, but

tend to have higher takeover premiums in completed deals. Bidder lawsuits are typically filed

in an effort to remove a target’s takeover defenses. Therefore, settlements in bidder lawsuits

occur when an initially hostile transaction turns into a friendly deal, and the target company is

acquired, generally at a higher takeover premium. In contrast, target company suits are usually

designed to block an unwanted transaction or to force a higher bid premium. If they are

successful, the bidder drops its offer and the litigation is dismissed. Thus, it is not surprising

that none of the target lawsuits are settled in court, and if the deal is completed, it is done at a

higher takeover premium.

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Finally, we note that we have far more class actions than derivative cases in our final

sample. As Thompson and Thomas (2004) noted, shareholders prefer to bring class actions to

challenge mergers and acquisitions transactions because they do not need to overcome the

additional procedural barriers that are raised in derivative suits. The other differences between

the two types of shareholder suits are not statistically significant.

4. Litigation, Offer Features and Outcomes

4.1 Univariate Analysis

In this section, we present univariate analysis of average M&A offer features and offer

outcomes for offers with and without litigation challenging the M&A offer, for the full sample

as well as for several sub-samples, namely large offers, hostile offers, offers involving

controlling shareholder squeeze-outs, offers involving top-tier target and bidder legal advisors,

and offers involving target and bidder firms with higher takeover defenses.

The first two columns of Table 3A examine all offers in our sample, and show that larger

offers attract litigation significantly more frequently than smaller offers. If we segregate the

M&A offers into small, medium and large offers, where small offers have transaction values of

$100 million or less, medium sized offers have transaction values between $100 million and $1

billion, and the large offers have values of more than $ 1 billion, we find 5.5% of small offers,

15.8% of medium sized offers and 27.7% of large offers attract litigation.

We also find lawsuits are significantly more likely to arise in hostile offers, multiple-

bidder offers, and tender offers. Litigation is significantly more common for offers where the

bidder has a prior toehold in the target (both controlling shareholder stake and minority stake)

or where the transaction includes a target termination fee provision. The purchase prices in

litigated offers also involve a higher percentage of cash payments. The average time to

completion, defined as the time (in days) between the announcement and deal completion

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dates, is 99.6 days for completed deals in our sample. Litigation tends to delay the completion of

deals that are eventually successful, compared to offers that are not litigated. Offers that involve

litigation are completed at a significantly lower rate, but at a significantly higher takeover

premium than offers that do not involve litigation.

Larger offers are economically more meaningful to analyze, and often reflect a bidder

management’s empire building motivations and elicit stiffer resistance from targets. We

segregate offers into those greater than or equal to the median offer size, which is $80 million in

our sample, and those that are smaller. The last two columns of Table 3A examine the effects of

litigation on offer features and outcomes for large offers only. We find that litigation is more

likely to occur in cross-industry offers, hostile offers, multiple-bidder offers, and in offers

involving controlling shareholder squeeze-outs, bidder toeholds, more cash financing, and

target termination fee provisions. Offers entailing litigation are also less likely to be completed,

and take a longer time to completion, if successful. However, there is no significant difference in

the takeover premium in completed offers between large offers that are litigated versus those

that are not.

One of the important drivers of M&A outcomes is whether an acquisition bid is hostile

or friendly. The first two columns of Table 3B examines the effects of litigation on offer features

and outcomes for hostile offers only. There are only 40 offers classified as “Hostile” in Thomson

Financial’s SDC database, and there are 77 offers classified as “Unsolicited”. If we include the

unsolicited offers in the “hostile” category (as opposed to friendly or solicited offers), there are a

total of 107 hostile offers, of which 30 are subject to litigation, and 77 are not. Thus, hostile offers

represent a small subset of M&A offers potentially because they became relatively rare in the

U.S. over our sample period [Schwert (2000)].

We find that the average offer size is significantly larger for hostile offers subject to

litigation compared to hostile offers without litigation. The only other offer feature that is

25

significantly different between the two subsamples is target termination fees, which are

significantly more prevalent in hostile offers that are subject to litigation than hostile offers that

are not. In deal outcomes, hostile offers that are also subject to litigation entailed a significantly

higher takeover premium in completed deals than hostile offers that are not subject to litigation.

While deal completion rates are significantly lower for hostile offers as compared to all offers,

there is no significant difference between hostile offers that entail litigation versus those that do

not. Finally, lawsuits settlement rates are significantly lower for hostile offers as compared to all

litigated offers (shown in the first column of Table 3A).

If we examine only the pure “hostile” offers (coded as such in the SDC database), then

none of the above variables – offer size, incidence of target termination fee provision, and

takeover premium in completed deals – is significantly different for hostile offers that are also

subject to litigation as compared to hostile offers that are not. Indeed, there are only 2 pure

“Hostile” offers that entail target termination fee provisions. The implication is that these

features are more related to whether an offer is unsolicited or not rather than whether an offer is

hostile or not. Indeed, if we examine only the unsolicited offers, then offer size is significantly

higher, target termination fee provision is significantly more prevalent, and takeover premium

in completed deals is significantly higher for unsolicited offers that are subject to litigation,

compared to those that are not. This is consistent with the results reported in Bates and

Lemmon (2003), which imply that, although target termination fee provisions are relatively rare

(but not non-existent) in hostile offers, they are more prevalent in litigated offers and

unsolicited offers.

Controlling shareholder squeeze-outs result in more frequent litigation because they

involve conflict of interest transactions. The control shareholder also has better opportunities to

complete deals because of its voting power. Hence, we examine the effects of litigation on offer

features and outcomes for controlling shareholder squeeze-out offers in the last two columns of

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Table 3B. There are 105 bids that constitute controlling shareholder squeeze-outs, of which 48

are subject to litigation. Again, we find that litigation is positively and significantly correlated to

the average offer size for controlling shareholder squeeze-out offers. Similarly, the proportion of

cash financing and target termination fees are both significantly correlated with an increased

likelihood of litigation. Moreover, controlling shareholder squeeze-out offers that are subject to

litigation have (weakly) significantly higher takeover premiums in completed deals. Finally,

settlement rates are significantly higher in lawsuits challenging controlling shareholder

squeeze-outs compared to other litigated offers, a consequence of the more plaintiff-friendly

legal regime that applies in squeeze-out cases.

Our sample includes 76 bids involving dual-class-share target firms, of which 2 are

coded as controlling shareholder bids.8 Recognizing that majority shareholding may not be

controlling shareholding in a dual-class-share firm, we re-coded these 2 offers as not being

controlling shareholder squeeze-outs and rechecked our results. We find that the above results

continue to hold.

To study the impact of top-tier target law firms in litigated cases, we examine in the first

two columns of Table 3C offers that involve a top-10 target legal advisor. Most of the

associations documented for the total sample also hold in this sub-sample, except that lawsuits

are significantly less likely where the target employs a top-tier legal advisor and agrees to pay

termination fees. The lawsuit settlement rate is lower and the probability of cash settlements is

higher in litigated offers involving a top-tier target law firm compared to all other litigated

offers (shown in the first column of Table 3A), implying that, consistent with their clients’ (the

target board of directors’) interests, top target law firms tend to negotiate lawsuit settlements

only in strong cases that support increased payment to shareholders.

8 Dual-class firm coding is taken from Andrew Metrick’s web site.

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The last two columns of Table 3C examine the effects of a top-10 bidder legal advisor.

They are remarkably similar to those found for top ten target advisors, except that there are no

significant differences between the likelihood of termination fee provisions and average

takeover premiums in completed deals between litigated and non-litigated bids. We also

observe more settled cases and more frequent cash payments to shareholders when we compare

litigated bids with top ten bidder law firms to all litigated offers (shown in the first column of

Table 3A), suggesting that top bidder law firms elect to pursue settlements more often.

Overall, Table 3C shows that, compared to the full sample: (a) the deal completion rate is

significantly lower and the average takeover premium in completed deals is significantly higher

in litigated offers involving top-target law firms, and (b) for offers involving top bidder law

firms, while the deal completion rate is significantly lower for litigated offers as compared to

non-litigated offers, the deal completion rate is significantly higher for offers that are not

litigated than in the full sample of offers. These findings suggest that (i) top-tier law firms

effectively represent their clients’ interests in mergers and acquisitions, presuming that target

managers generally prefer to remain independent unless they receive a sufficiently high

premium, while bidder managers generally want to complete their acquisitions, and (ii)

litigation has similar effects on offer outcomes (lower completion rates and at higher takeover

premium) as the involvement of top target law firms. Hence, we need to carefully control for

legal advisor reputation effects, while examining the effects of M&A litigation on offer

outcomes (see Section 4.2).

Next, we examine the effects of takeover defenses on deal completion and bid premium

because Gompers, Ishii, and Metrick (GIM, 2003) hypothesize that a firm’s anti-takeover

provisions can result in higher agency costs manifested by inefficient investment and self-

dealing. For targets protected by anti-takeover provisions, entrenched managers have weaker

incentives to operate the firm efficiently. For acquirers, Masulis, Wang and Xie (2007) find

28

evidence that managements protected by more antitakeover provisions are more likely to

indulge in unprofitable empire-building acquisitions.

The GIM index of anti-takeover provisions is based on 24 takeover defense provisions of a

firm available from the Investor Responsibility Research Center (IRRC) database, whose

publications are in years 1990, 1993, 1995, 1998, and every other year since. Alternatively,

Bebchuk, Cohen, and Ferrell (BCF, 2009) construct an Entrenchment Index (E-Index) based on

the 6 most important features of the 24 governance provisions in the GIM index [namely, (a)

staggered boards, (b) limits on shareholder bylaw amendments, (c) supermajority requirements

for mergers, (d) supermajority requirements for charter amendments, (e) poison pills and (f)

golden parachutes. They show that increased values of the E-Index are associated with a

significant reduction in firm value and large negative abnormal returns, and that only these 6

provisions drive the correlation between the takeover defenses, reduced firm value and lower

stock returns. By implication, the BCF E-Index may be a more accurate method to segregate

bidder and target firms into more and less protected firms.

We are able to determine the BCF E-Index values for 708 target firms and 712 bidder firms

in our total sample of 2512 firms.9 The median BCF E-Index score in our sample (and, more

generally, for all firms) is 2. We segregate firms into high (low) E-Index bidder and target firms

indicating more (less) protected bidders and targets based on a firm having a BCF E-Index level

greater than (less than or equal to) the median BCF E-Index score of 2.

The first two columns of Table 3D examine the associations of litigation for offers involving

high E-Index target firms only. The effects of litigation are similar to those for all offers

presented in the first two columns of Table 3A, except that there is no difference between deal

completion rates for bids with litigation and bids without lawsuits.

9 The BCF E-Index data is taken from Lucian Bebchuk’s web site. Following GIM and BCF, we assume that during the years between two consecutive publications, firms have the same governance provisions as in the previous year.

29

The last two columns of Table 3D examine the associations of litigation for high E-Index

bidder firms only. The results are generally similar to those when we examined the more

protected target firms. The one exception is that the average deal completion rate is significantly

lower for more protected target firms than for the more protected bidder firms, showing that

anti-takeover provisions are put in place by target managements as a defense from being taken

over, but can enable bidder managements more freedom to complete acquisitions, often for

empire building purposes.

As a final check (untabulated), we also segregate the firms into high (low) GIM bidder and

target firms based on a firm having a GIM index level equal to or greater (less) than the median

GIM of 9. As with the BCF E-Index, we are able to determine the GIM index values for 708 target

firms and 712 bidder firms from the IRRC database.

The results are similar to those when we examined the high BCF E-Index target firm offers

examined in Table 3D, except that target termination fee provisions are less prevalent at high

GIM index target firms subject to lawsuits (55.74% of the time) than at high E-Index target firm

litigated offers. Thus, using the E-index, rather than the GIM index, more clearly shows that

challenges to the size of breakup fees are more prevalent at more protected targets, leading to

fewer value-creating-deal completions, and indirectly highlighting the stronger link between

the E-Index and value destruction. We also find that both the lawsuit settlement rate and the

proportion of settled deals entailing payments are higher when we use the GIM Index (at

36.67% and 45.45% respectively) rather than the BCF E-Index to examine more protected target

offers, again highlighting the possibility that the BCF E-Index may be a more accurate method

to segregate target firms into more and less protected firms, given that the more protected

targets wish to remain independent and lawsuits only settle if deals are completed.

When we examine the effects of litigation on offer outcomes and settlement rates for deals

by high GIM score bidder firms, the results are again similar to those when we examined the

30

high E-Index bidder firms, except that both the lawsuit settlement rate and the proportion of

settlements that involve payments are higher when we use the GIM Index (at 31.11% and

35.71% respectively). This is an interesting result since lawsuits settlements are highly

correlated with deal completions (see section 4.3), which more protected bidder managers

presumably want, implying that the remaining 18 anti-takeover provisions encapsulated in the

GIM Index may be needed to capture a protected bidder’s empire building incentives better.

Overall, we find that lawsuits are more prevalent in certain types of offer namely larger and

hostile offers, and with certain types of deal structures, namely target termination fee provisions

and higher cash payments, and lead to significantly different offer outcomes – deal completion

rates and takeover premia in completed deals – than in non-litigated offers.

4.1.1 Correlations

However, to obtain more reliable evidence on the effects of litigation on deal outcomes, we

need to control for offer and litigation features, bidder and target advisor expertise, and for

selection bias, in a multivariate setting, which is what we do in the next section.

Before we do that, we examine how correlated some of our key explanatory variables are.

For example, M&A law firms and investment banks may be selected because of offer

complexity and perhaps past client relationships, and the probability of litigation is also likely

determined by offer complexity.

Table 4 reports the pairwise Pearson’s correlations between our key explanatory variables:

Pre-deal-Completion litigation, litigation that is initiated before the M&A offer outcome is

realized, indicators for top bidder and target law firms and investment banks, which proxy for

top advisor expertise, and offer features that are arguably endogenous -- percentage stock

financing, and indicator variables for tender offer and termination fee provisions. The table

shows that the hiring of only the top target law firm is significantly and positively correlated

31

with litigation. However, the hiring of top target and bidder legal and financial advisors are all

significantly correlated. The hiring of top target and bidder legal and financial advisors are also

significantly correlated with incidences of target termination fee provision. But, almost all of the

correlations are less than 30%.

4.2 Multivariate Analysis

In all our multivariate analyses, in addition to offer and litigation features and bidder

and target advisor expertise variables, we also include βY is a vector of year fixed effects and βI

is a vector of 10 bidder industry fixed effects, based on the 10 broad Fama-French industry

sectors. Since the explanatory variables and residuals may exhibit serial correlation because of

multiple firm and industry observations in the sample, we use industry-clustered standard

errors to produce more accurate confidence intervals that Petersen (2009) finds are well-

specified in such situations. We also examine several specifications of each regression model,

namely: with and without litigation variables, with and without potentially endogenous offer

features, with and without M&A intermediary effects, and with and without any interaction

variables, to ensure that our main results are robust. We also control for endogeneity as

explained below.

4.2.1 Probability of Litigation

Table 5A examines the probability of litigation in M&A offers, and reports the

regression coefficients (and the associated z statistics in parenthesis) of different specifications

of the following general logit regression model:

(1) Litigation = βY + βI + β1 Offer Size + β5 Intra-Industry Offer + β3 Hostile Offer + β4 Multiple-Bidder Offer + β5 Controlling Shareholder Squeeze-out +

β6 Bidder Minority Stake + β7 Cash Financing +β8 Target Termination Fee + β9 Tender Offer +β10 Top Target Law firm + β11 Top Bidder Law firm +

β12Top Target Investment Bank + β13 Top Bidder Investment Bank + β14 Controlling Shareholder Squeeze-out × Offer Size + β15 Hostile Offer × Offer Size +ε.

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The first column of Table 5A reports on a short regression specification, and shows that

offer size, hostile bids, and controlling shareholder squeeze-outs are all associated with a higher

probability of litigation. This is expected; larger deals involve greater sums of money, and

therefore higher potential damages for plaintiffs if they are successful; hostile deals raise issues

of possible target board entrenchment motives, as well as the potential for claims under a more

favorable standard of judicial review, at least in Delaware, under Unocal Corp. v. Mesa

Petroleum Corp., 493 A.2d 946 (1985) or Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc.,

506 A.2d 173 (1985);.10 and finally, controlling shareholder squeeze-outs are given extra judicial

scrutiny because of the inherent conflict of interest that the control shareholder faces in setting

the purchase price for the minority investor shares [Weinberger v. UOP, 457 A.2d 701 (Del.

1983)]. As Subramanian (2004) notes, these transactions frequently spawn litigation.

Given that larger offers, hostile bids and controlling shareholder squeeze-outs are all

strongly associated with a higher probability of litigation, we examine the interaction effects of

both indicators for hostile bids and controlling shareholder squeeze-outs with deal size on the

probability. The second column of Table 5A shows that while the effect of Controlling Shareholder

Squeeze-out × Offer Size is insignificant, larger hostile bids are significantly related to a higher

probability of litigation, consistent with our earlier univariate statistics in Table 3B.

The third column reports on a regression specification that includes potential endogenous

offer variables: Cash Financing, Target Termination Fee, and Tender Offer. We find that a higher

percentage of cash financing is associated with a higher probability of litigation because cash

transactions are more likely to trigger strict Revlon duties that provide target shareholders with

stronger legal claims. Revlon duties are triggered by a “change of control” transaction, and the

10 Hostile offers continue to be strongly significantly associated with the probability of litigation even when we exclude “Unsolicited” offers from being classified as hostile offers.

33

courts have been more willing to find a change of control has occurred when a target company

shareholders’ entire stake in the firm is purchased for cash rather than for stock.

We also find that target termination fee provisions are associated with a higher

probability of litigation, contrary to Coates (2009). However, we use hand collected data in our

study, unlike Coates who suggests that his conclusions “should be treated carefully” because of

limitations of SDC data on litigation. We argue that the greater likelihood of litigation over deal

breakup fees reflects judicial unwillingness to provide a bright line test for the appropriate level

of deal breakup fees, and that they can be attacked as “preclusive” defenses under Unocal, so

that shareholders have legal grounds to challenge the termination fees paid in virtually every

deal.

The final specification includes controls for the financial and legal advisor expertise, as

proxied by their top-tier rankings. We find that hiring of top-tier target and bidder law firms is

significantly associated with the incidence of litigation: top legal advice is sought in litigious

deals, particularly by the target firms.

We next examine the association of Pre-deal-completion Litigation (litigation that occurs

before deal outcomes are realized) with deal outcomes. As Table 1B shows, Pre-deal-completion

Litigation is over 96% of Litigation offers in our sample.

4.2.2 Probability of Offer Completion

Since the evidence from Table 5A shows that offer features as well as M&A advisory

expertise are associated with litigation, to obtain more reliable evidence on the effects of pre-

deal-completion litigation on deal outcomes, we employ a multivariate analysis where we

control for offer characteristics and financial and legal advisor expertise. But it is possible that

litigation appears to be associated with certain deal outcomes simply because litigation occurs

more frequently in types of offers where the observed outcomes are more likely. To control for

34

selection bias, we implement an instrumental variable (IV) simultaneous equations regression

model using limited information maximum likelihood (LIML) estimation [see Juergens and

Lindsey (2009), Krishnan, Ivanov, Masulis, and Singh (2011), and Krishnan and Masulis (2011)],

where pre-deal-completion litigation is the endogenous covariate. An IV should have the

properties that while it strongly predicts litigation, it is unrelated to the dependant variables (the

deal outcomes) being examined –- Completed Offer or Takeover Premium -- to meet the exclusion

requirement.

All the offer characteristics that we examine can be argued to be related to one or both of the

deal outcome variables, invalidating their use as instruments under the exclusion requirement.

So, we look at recent historical associations to establish our IVs. In particular, we define Bidder

(Target) High Litigation Industry as an indicator variable that takes a value of 1 in the current year

for the 2-digit SIC codes of top 10 bidder (target) industries where an M&A bid has been

litigated in the past 3 years. For computing this indicator for the year 1999 we use data from

Thomson Financial’s SDC database over the 1996-1998 period. For computing this indicator for

the year 2000, we use our hand-collected litigation data for 1999 and the 1997-1998 data from

SDC. The top 10 industries for which Bidder High Litigation Industry takes the value of 1 in 1999

are chemicals, machinery, electronics, transportation equipment (which are all found in Eckbo

(1992) to be industries in which mergers are most often challenged), communications, utilities,

banks, insurance, and financial companies, which are all regulated industries [see Agrawal and

Knoeber (1996)] where M&A regulatory or execution risk is naturally high because of more

demanding regulatory requirements, and oil and gas, where there could be reserves valuation

and environmental issues. The top 10 industries for which Target High Litigation Industry takes

the value of 1 in 1999 are similar, except that transportation equipment is replaced by

instruments, where there can be a high level of sensitive proprietary information, and financial

services is replaced by business services, where a large number of similar size competitors

35

exists. These are also the top 10 industries for which Bidder High Litigation Industry takes the

value of 1 in 2000 except that one regulated industry, insurance, is replaced by another,

financial companies. The top 10 industries for which Target High Litigation Industry takes the

value of 1 in 2000 are the same as those for which Bidder High Litigation Industry takes the value

of 1 in 2000 except that financial companies is replaced by heath care, (where deals are generally

fraught with technical, regulatory and commercial risks). We use Bidder High Litigation Industry

and Target High Litigation Industry indicator variables as IVs.

Economically, the choice of these indicators as instruments is justified because industries

that attracted M&A litigation in the past are more likely to attract litigation in future. However,

there is no compelling reason to expect past industry associations with litigation to be related to

M&A deal outcome variables in the presence of current offer characteristics and whether the

current deal is associated with litigation, other than through litigation itself. Statistically, we

examine the validity of the instruments by performing overidentification tests. The F-statistic

for the joint significance of the two IVs is 13.9 for Pre-deal-completion Litigation indicator, which

is above the critical value of 10 recommended by Staiger and Stock (1997). The Anderson-Rubin

statistic for overidentification results in insignificant p-values for either M&A outcome variable,

namely offer Withdrew or Takeover Premium in completed deals, after controlling for other major

offer characteristics including Pre-deal-completion Litigation. Thus, we fail to reject the joint null

that the IVs are uncorrelated with the error term and hence are correctly excluded from the

second-stage equation, and Bidder (Target) High Litigation Industry indicators statistically satisfy

the exclusion requirement of valid instruments.

Table 5B reports the regression coefficients and associated z-statistics (in parenthesis)

based on heteroskedasticity-consistent standard errors adjusted for industry clustering of

different specifications of the following IV model using LIML estimation, where Pre-deal-

completion Litigation is the endogenous covariate:

36

(2) Completed Offer = βY + βI + β1 Pre-deal-completion Litigation + β2 Offer Size + β3 Intra-Industry Offer + β4 Hostile Offer + β5 Multiple-Bidder Offer + β6 Controlling Shareholder Squeeze-out + β7 Bidder Minority Stake + β8 Delaware Suit + β9 Target Suit + β10 Bidder Suit + β11 Stock Financing + β12 Target Termination Fee + β13 Tender Offer +β14 Top Target Law Firm + β15 Top Bidder Law Firm + β16Top Target Investment Bank + β17 Top Bidder Investment Bank +ε. The first column of Table 5B reports the results of a short regression specification that

includes only Pre-deal-completion Litigation and certain offer variables as controls. Pre-deal-

completion Litigation is associated with a higher probability of deal failure. The signs on the

control variables are as expected, namely intra-industry offers are associated with a higher

probability of deal completion, while the deal complexity variables -- hostile bids and multiple-

bidder offers -- are associated with a lower probability of deal completion.11 Bidder pre-offer

minority equity stake is also significantly negatively associated with the probability of deal

completion because toeholds can be viewed as aggressive moves by bidders that tend to

antagonize entrenched target managers and make successful deal completions more difficult

[Betton, Eckbo and Thorburn (2009)].

The second column shows that the three additional litigation features– indicator

variables for whether the suit is filed in Delaware, or it is a Bidder suit or a Target Suit – are not

significantly associated with the probability of deal completion. Because shareholder suits form

the vast majority of all suits and we have controlled for bidder and target suits in this

specification, the interpretation of the Pre-deal-completion Litigation coefficient is that shareholder

litigation is associated with a higher probability of deal failure.

The third specification (reported in the third column) includes arguably endogenous

offer features, and shows that the associations uncovered by the simple model continue to hold

11 When we exclude unsolicited offers from being classified as hostile offers, we are left with only 40 hostile offers in our sample, and hostile continues to be negatively and significantly (at the 10% level) associated with deal completion probability.

37

even after controlling for these offer characteristics. In line with the results reported in Officer

(2003), offers that have target termination fee provisions, and tender offers are associated with a

higher probability of deal success.

The final specification (reported in the fourth column) includes legal and financial

advisor expertise as control variables. Top target law firms and pre-deal-completion litigation

are both associated with a significantly higher probability of deal failure, whereas top bidder

law firms and both top target and bidder investment banks [see Krishnan and Masulis (2011)

and Rau (2000)] are associated with a significantly higher probability of deal completion relative

to other less prominent advisors.12 This evidence is consistent with the claim that top

investment banks and top bidder law firms try to ensure that deals are completed and they

receive their fees,13 whereas top target law firms try to stop some hostile offers from being

completed. Importantly, litigation also creates significant risks of non-completion of the

transaction.

4.2.3 Takeover Premium in Completed Deals

Table 5C reports the regression coefficients, and associated t-statistics (in parenthesis)

based on heteroskedasticity-consistent standard errors adjusted for industry clustering, for

different specifications of the following IV model using LIML estimation, where Pre-deal-

completion Litigation is the endogenous covariate:

12 When we reconstruct the top-10 target law firm league-table list after excluding specialty Delaware counsels, the results are very similar to the results reported in Table 5B. 13 In a friendly deal, the typical banker sell side fee would be a flat fee plus an incentive fee dependent on the transaction closing. The incentive fee is, by far, the most important payment to bankers, in some instances 98% of their total fees, giving them a big incentive to get the deal done [Atheros Communications, Inc. Shareholder Litigation, 2011 Del. Ch. LEXIS 36 (Del. Ch. March 4, 2011)]. In a similar vein, the buy side banker’s fees are normally derived largely from providing the financing for the acquisition, and they only earn them if the deal is completed [Del Monte Foods Company Shareholders Litigation, 2011 Del. Ch. LEXIS 30 (Del. Ch. February 14, 2011)]. Although most law firms work on an hourly basis, the top ones stress the importance of obtaining follow up business (to maintain or enhance their market shares). To this end, the compensation structure for lawyers (especially in top law firms) can provide incentives similar to those provided to the investment bankers.

38

(3) Takeover Premium = βY + βI + β1 Pre-deal-completion Litigation + β2 Offer Size + β3 Intra-Industry Offer + β4 Hostile Offer + β5 Multiple-Bidder Offer + β6 Controlling Shareholder Squeeze-out + β7 Bidder Minority Stake + β8 Delaware Suit + β9 Target Suit + β10 Bidder Suit + β11 Stock Financing + β12 Target Termination Fee + β13 Tender Offer +β14 Top Target Law Firm + β15 Top Bidder Law Firm + β16Top Target Investment Bank + β17 Top Bidder Investment Bank +ε.

The first column of Table 5C reports the results of a short regression specification

that includes only Pre-deal-completion Litigation and certain offer variables as controls. Pre-deal-

completion Litigation is associated with significantly higher takeover premium in completed

deals. Multiple-bidder offers, because of their competitive nature, and controlling shareholder

stakes, because of the stronger legal position of minority shareholder claims in such offers, are

both associated with significantly higher takeover premia in completed deals.

The second column includes the three additional litigation features– indicator variables

for whether the suit is filed in Delaware, or it is a Bidder suit or a Target suit. Target Suits are

associated with significantly higher takeover premia, suggesting that litigation is an effective

mechanism for pressuring bidders into increasing offer prices. Because shareholder suits form

the vast majority of all suits, and we have controlled for bidder and target suits, we interpret

model 2 as showing that shareholder litigation is associated with higher takeover premium in

completed deals.

The third specification (reported in the third column) includes arguably endogenous

offer features, and shows that the associations uncovered by the simple model continue to hold

even after controlling for other offer characteristics. In line with the results reported by Officer

(2003), we find offers with target termination fees and tender offers are associated with

significant higher takeover premia. More stock financing is also associated with higher takeover

premia, as market timing allegations or weak stock performance can result in higher takeover

premia payments.

39

The final specification (reported in the fourth column) includes legal and financial

advisor expertise as control variables. Top target law firms and pre-deal-completion litigation

are both associated with a significantly higher takeover premium in completed deals.14 This is

consistent with the claims that top tier target law firms are successful in employing defensive

strategies on behalf of their clients that raise the price bidders must pay to acquire target

companies and that litigation raises deal premia in completed transactions. Other top-tier

advisors are not associated with significantly higher takeover premia.

Overall, the results of multivariate analyses confirm the univariate ones. Lawsuits are more

prevalent in certain types of offer namely larger offers, hostile offers and offers entailing

controlling shareholder squeezeouts, and with certain types of deal structures, namely target

termination fee provisions and higher cash payments, and are associated with significantly

lower deal completion rates and significantly higher takeover premia in completed deals as

compared to non-litigated offers, even after controlling for other offer features.

Examining the economic effects of litigation on deal completion rates and takeover premia,

we find that, after controlling for other offer features of the full specifications of Tables 5B and

5C, the probability of deal completion decreases by 5.8% when an M&A offer is subject to

litigation. However, again controlling for other offer features included in of the full

specifications of Tables 5B and 5C, the average takeover premium in completed deals increases

by 9% when an M&A offer is subject to litigation. Overall, pre-deal litigation raises the expected

takeover premium by about 0.8%, implying that the expected rise in the takeover premium

more than offsets the expected fall in the deal completion probability.15 In other words, on

average, M&A litigation generates a net benefit for target shareholders.

14 When we reconstruct the top-10 target law firm league-table list after excluding specialty Delaware counsels, the results are very similar to the results reported in Table 5C. 15 The change in expected takeover premium is given by the change in deal completion probability multiplied by the expected takeover premium, conditional on an M&A offer not being subject to litigation plus the change in expected

40

4.2.4 Additional Sensitivity Analysis

Alternative Definitions of Takeover Premia

Although our primary focus is on takeover premia measured relative to target stock

price 1 week before the deal announcement, we also find our results are robust to measuring

takeover premia by either target stock price 1 day or 4 weeks prior to the deal announcement.

Further, in our sample, about 6% of takeover premia in completed deals are negative, which is

potentially troubling [as noted by Officer (2003)], as zero is likely to be an economically

meaningful lower bound, and this is being violated in these cases. Hence, we also investigate

the effect of placing a lower bound on takeover premia at zero and then re-estimate regression

models of Table 5C using a Tobit model, which is appropriate when negative takeover premia

are replace by a value of zero. We find that our earlier results are robust, as Pre-deal-completion

Litigation continues to be significantly and positively associated with Takeover Premium.

Controlling for Bidder and Target Anti-Takeover Provisions

We include as an additional explanatory variables in the regressions examined in

specification 4 of Tables 5B and 5C one of the following variables: High Target E-Index or High

Target-GIM, as alternative indicator variables for offers to more protected target firms, and High

Bidder E-Index or High Bidder-GIM as alternative indicator variables for offers by more protected

bidder firms. When we include the more protected target (bidder) indicator variable as an

additional regressor, the sample over which the regressions are estimated is 708 (712) offers. We

find that our main results continue to hold: Pre-deal-completion Litigation has a significant

negative association (at the 1% significance level) with the offer completion rate and a

significant positive association (at the 5% significance level) with Takeover Premium in completed

deals. The more protected target (bidder) indicator variable is weakly (at the 10% significance

takeover premium multiplied by the probability of deal completion, conditional on an offer being subject to pre-deal completion litigation.

41

level) and negatively (positively) associated with the deal completion rate, and insignificantly

associated with the Takeover Premium in completed deals.

4.3 Analyzing Litigation Settlements and Consideration Payments in Shareholder Suits

One final key question we examine is what are the factors that make it more likely that

litigation will produce favorable settlements and cash payments upon settlement for plaintiffs?

Critics of shareholder litigation argue that class action suits rarely produce any benefits for

shareholders (Romano 1991). Our data permit us to examine this issue both in terms of the

likelihood of settlements and monetary payments in settlements of shareholder suits.

In analyzing settlements, we need to carefully describe the process that occurs in

shareholder litigation. These cases are litigated on an expedited basis so that they can progress

on the same time table as the transaction involved. As the deal is working toward completion,

the attorneys for the target and bidder are negotiating with the plaintiff shareholder attorneys

in an effort to achieve a settlement, or to otherwise dispose of the litigation. Both sides try to

persuade the other of the merits of their position with an eye toward resolution of the litigation

at the same time that the deal is finalized. If the deal is not completed, then the plaintiffs’ claims

generally become moot and the case may be dismissed without a settlement. Thus, for purposes

of our analysis, this means that the variable Settled is determined at about the same time as the

variable Completed. Indeed, of the shareholder litigation offer sample (class action and

derivative action lawsuits) all but 7 offers that are settled are also completed.

Hence, Completed Offer is an endogenous covariate in the analysis of Settled or Consideration

Paid, and we implement an instrumental variable (IV) simultaneous equations regression model

using limited information maximum likelihood (LIML) estimation. The IV should have the

properties that while it strongly predicts deal completion but is unrelated to Settled or

Consideration Paid to meet the exclusion requirement.

42

Again we look at recent historical associations to establish our IVs, and define Bidder (Target)

High Litigated-Offer Completion Industry as an indicator variable that takes a value of 1 in the

current year for the 2-digit SIC codes of top 10 bidder (target) industries where an M&A bid has

been litigated but still successfully completed in the past 3 years. As before, for computing this

indicator for the year 1999 we use data from Thomson Financial’s SDC database over the 1996-

1998 period. For computing this indicator for the year 2000, we use our hand-collected data for

1999 and the 1997-1998 data from SDC. The top 10 industries for which Bidder High Litigated-

Offer Completion Industry takes the value of 1 in 1999 and 2000 of our sample are the same as the

top 10 industries for which Bidder High Litigation Industry takes the value of 1 in these 2 years.

The top 10 industries for which Target High Litigated-Offer Completion Industry takes the value of

1 in 1999 and 2000 are the same as the top 10 industries for which Target High Litigation Industry

takes the value of 1 in these 2 years except that one regulated industry, insurance, is replaced

with another, financial companies in 1999. We use these two indicator variables, Bidder High

Litigated-Offer Completion Industry and Target High Litigated-Offer Completion Industry, as IVs.

Economically, the choice of these indicators as instruments is justified because deals in

industries that successfully completed despite the litigation in the past are more likely to do so

again in future. However, there is no compelling reason to expect past industry associations

with litigated offer completions to be related to current M&A litigation settlement variables in

the presence of current offer characteristics and whether the current deal is successfully

completed, other than through Completion itself. Statistically, we examine the validity of the

instruments by performing overidentification tests. The F-statistic for the joint significance of

the two IVs is 12.2 for Completion, which is above the critical value of 10 recommended by

Staiger and Stock (1997). The Anderson-Rubin statistic for overidentification results in

insignificant p-values for either M&A dependent variable, namely offer Settled or Consideration

Paid in completed deals, after controlling for other major offer characteristics including

43

Completion. Thus, we fail to reject the joint null that the IVs are uncorrelated with the error term

and hence are correctly excluded from the second-stage equation, and Bidder (Target) High

Litigated-Offer Completion Industry indicators statistically satisfy the exclusion requirement of

valid instruments.

Table 6A reports the regression coefficients and associated z-statistics (in parenthesis)

that are based on heteroskedasticity-consistent industry-clustered standard errors, for several

specifications of the following IV model using LIML estimation, analyzing settlements for our

shareholder litigation cases.

(4) Settled = βY + βI + β1 Completed Offer + β2 Offer Size + β3 Intra-Industry Offer + β4 Hostile Offer + β5 Multiple-Bidder Offer + β6 Controlling Shareholder Squeeze-out + β7 Bidder Minority Stake + β8 Delaware Suit +β9 MBO + β10 Cash Financing + β11 Target Termination Fee + β12 Tender Offer +β13 Top Target Law Firm + β14 Top Bidder Law Firm + β15 Top Target Investment Bank + β16 Top Bidder Investment Bank + β17 Controlling Shareholder Squeeze-out × Tender Offer +ε.

We revert to including Cash Financing, rather than Stock Financing in these regressions

because of the significant association of Cash Financing with the probability of litigation

uncovered in Table 5A. The first specification is a short regression model, where Completed Offer

and select offer variables are explanatory variables. As expected, the deal completion rate has a

significant positive association with a settlement because if the deal collapses, then the

plaintiffs’ claims generally become moot. Lawsuits challenging controlling shareholder

squeeze-outs have significant positive correlation with lawsuit settlements. This reflects the

strength of the underlying legal claims in these cases. Among the other control variables, intra-

industry mergers are positively associated with the probability of lawsuit settlements. This may

reflect within industry bidders’ strong interest in closing their transactions and therefore their

44

greater willingness to take actions to remove any potential obstacles, such as pending litigation,

to deal completion.

In the second specification, we include controls for whether the suit was filed in

Delaware Chancery Court, and whether the litigation stemmed from an MBO, and find that

neither of these two litigation variables are significantly associated with the probably of lawsuit

settlements.

In the third specification, we add potentially endogenous offer variables. Noting that

controlling shareholder squeeze-outs via tender offers could entail weaker legal claims and

therefore be less likely to lead to lawsuit settlements as well as to payment of consideration if

settled, we also add the interaction term, Controlling Shareholder Squeeze-out × Tender Offer. The

third column shows that controlling shareholder squeeze-outs via tender offers are indeed

negatively related to the probability of lawsuit settlements. Delaware law has subjected tender

offers to less intrusive judicial review, as opposed to mergers, since the mid-1990s [Solomon v.

Pathe Communications Corp., 672 A.2d 35 (Del 1996)]. While the effect on controlling

shareholder cash outs often is traced to the interaction of this doctrine with a subsequent

Delaware decision on short-form mergers in 2001 [Subramanian (2007)], this finding suggests

that the trend began earlier. However, if we add an additional interaction term, Controlling

Shareholder Squeeze-out × Delaware Suits, and re-examine the resulting estimates to see if a

settlement is more likely in a Delaware case against a controlling shareholder, we find (in

untabulated results) that this coefficient, though positive, is not significant at the 10%

significance level.

In the last specification we include top legal and financial advisor expertise as additional

control variables. Top target law firms significantly impede settlement of lawsuits. This

evidence supports the claim that top target law firms vigorously pursue dismissal of

shareholder litigation that includes allegations of fiduciary violations by their clients, the target

45

boards of directors. On the other hand, top bidder law firms are positively and significantly

associated with lawsuit settlements, supporting the premise that bidder legal advisers work

actively to settle lawsuits and complete deals. We find that neither of these financial advisor

reputation measures is significantly associated with the probability of lawsuit settlements.

Experienced mergers and acquisitions lawyers have advised us that investment bankers are

almost never involved in settlement negotiations that go on between shareholder plaintiffs’

attorneys on the one hand, and bidder and target attorneys on the other. In practice, both sides’

attorneys will assess the strength of the legal claims in the case and consult with their clients,

the companies or the shareholder representative, in order to decide whether to offer to settle the

case, and if so, on what terms.

Table 6B presents the results for several specifications of a broad regression equation

similar to Equation 4, except the dependent variable is now Consideration Paid, an indicator

variable for cash consideration paid upon lawsuit settlements. Again, Completed Offer is

instrumented with Bidder High Litigated-Offer Completion Industry and Target High Litigated-Offer

Completion Industry.

The first specification is a short regression model, where Completed Offer and select offer

variables are explanatory variables. Both Completed Offer and Controlling shareholder squeeze-out

are significantly and positively associated with dollar consideration paid upon lawsuit

settlements for the following reasons. If a deal collapses, then the plaintiffs’ claims generally

become moot. Controlling shareholder squeeze-outs are generally regarded as better plaintiff

cases because of the strength of the underlying legal claims.

In the second specification, we include controls for whether the suit was filed in

Delaware Chancery Court, and whether the litigation stemmed from an MBO, and find that

neither of these two litigation variables is significantly associated with Consideration Paid. In the

third specification, we add potentially endogenous offer variables. Cash deals are negatively

46

associated with Consideration Paid. Cash transactions are more likely to lead to the court’s

application of the stricter Revlon standard, but earlier work finds that they are less likely to

yield positive settlements [Thompson and Thomas (2004)]. Controlling Shareholder Squeeze-out ×

Tender Offer is not significantly related to the probability of monetary payments if there is a

lawsuit settlement (although it does reduce the likelihood of such a settlement as reported

above). Thus, controlling shareholder squeeze-outs, per se, affect lawsuit settlement payments.

In the last specification we include top legal and financial advisor expertise as additional

control variables. Top target and bidder law firms are both positively associated with

Consideration Paid. We interpret the law-firm findings as being consistent with their clients’

objectives: top target law firms are only willing to negotiate settlements in strong cases where

the plaintiffs’ claims support increased payment to the shareholders, while top bidder law firms

appear amenable to larger payments to facilitate suit settlement and deal completion. We find

that neither of the financial advisor expertise measures is significantly associated with

Consideration Paid. Usually, only the legal advisors to both parties assess the strength of the legal

claims and decide, along with the firms, the terms of settlements, if any.

In untabulated results, we find that the mean and median attorney fees awarded in

settled cases are $717,000 and $142,500 respectively. These are less than one-tenth the amount of

fees awarded in securities fraud class action settlements [Perino 2006], suggesting that M&A

litigation is much less costly than securities fraud suits. We also find that these results continue

to hold even after recoding 2 offers where bidders held controlling stakes in dual-class-share

targets as non controlling-shareholder squeeze-out offers. Alternatively, we keep the initial

controlling shareholder squeeze-out offer indicator coding as is, but instead add an indicator

variable for the 76 dual class target firms in our sample. The associations of the explanatory

variables with the probability of lawsuit settlements continue to remain the same as before,

except that top-tier target law firms now becomes significantly associated with a lower

47

settlement rate at the 1% significance level. The dual class target indicator variable itself is not

significantly associated with law suit settlements. The associations of the variables with the

probability of cash settlements of lawsuits also continue to remain the same as above, and the

dual class target variable itself is significantly and positively associated with the probability of

cash settlements of lawsuits.

5. Conclusion

We document the causes and effects of M&A litigation on offer outcomes. Using a hand-

collected dataset of M&A litigation cases matched to offers that do not entail litigation, we

document several novel findings. First, we find that about 12% of all announced deals attract

litigation and that larger offers, hostile offers, purchase prices involving more cash, termination

fee provisions and controlling shareholder stakes in target firms all are positively related to the

likelihood of a proposed M&A transaction attracting litigation.

Second, we document that, after controlling for offer features and M&A financial and

legal advisor reputations, industry and calendar time fixed effects as well as for selection bias,

offers subject to lawsuits are completed at a significantly lower rate than offers free of litigation.

Litigation is also associated with a significant increase in takeover premia in completed deals.

On balance, we find significant economic effects of litigation: the probability of deal completion

decreases by 5.8%, while the takeover premium in completed deals increases by about 9%, after

controlling for other offer features. The expected rise in takeover premium more than offsets the

fall in the probability of deal completion, so there is a rise in the expected takeover premium

paid in offers that are subject to pre-deal-completion litigation. Given that shareholder lawsuits

form the vast majority of all lawsuits in our sample, this evidence is consistent with the claim

that litigation causes, or helps to cause, increased bid premiums that occur in these transactions

because bidders often respond to target shareholder claims that an initial offer was too low by

48

generally raising their bids. If that does not happen, then the deal can fail. We also find that

offers that involve litigation entail a significantly longer time to completion than offers that do

not, consistent with the notion that M&A litigation delays the execution of deals that are

ultimately completed.

Third, federal court lawsuits, though far fewer in number than state suits, attract a

significantly higher proportion of bidder and target initiated cases compared to state courts.

Bidder and target lawsuits have significantly lower settlements rates than other types of

lawsuits. Target lawsuits, which are generally designed to impede an offer, are also associated

with higher takeover premia paid in completed deals.

Finally, examining settlements of shareholder lawsuits, we find, as expected, that deal

completion rates are positively associated with settlements because in an overwhelming

majority of cases, positive settlements only occur in completed deals. Both the lawsuit

settlement rate and the proportion of settled lawsuits in which cash consideration is paid are

higher for controlling shareholder squeeze-out offers compared to management buyouts and

other types of offers, due to the more plaintiff-friendly legal regime that applies in these

squeeze-out cases. However, if a controlling shareholder uses a tender offer, there is a fall in the

likelihood of settlement, reflecting a carve-out of these transactions from the otherwise plaintiff-

friendly legal regime. Offer completion rates are also the highest for controlling shareholder

squeeze-out offers as compared to other types of offers, reflecting the fact that a controlling

shareholder can unilaterally insure that a deal is completed.

Our results demonstrate the importance of considering litigation’s impact on the market for

corporate control in any empirical research examining the determinants of M&A transaction

outcomes. Further research in the area would benefit greatly from improved federal securities

law disclosure requirements concerning deal litigation. In particular, the SEC should require

target firms to disclose all pending litigation in M&A transactions as part of their Schedule 14d-

49

9 filings required in tender offers, and Schedule 14A proxy statement disclosures to

shareholders for mergers. Current requirements leave companies the option of not disclosing

some cases. Moreover, the SEC should create stronger incentives for compliance with its

existing disclosure requirements, as we observe many recent corporate disclosures about M&A

transactions provide incomplete information about the litigation cases that they do disclose.

50

References

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53

Table 1

Sample Descriptive Statistics Panel A reports descriptive statistics for our initial sample of all lawsuits filed challenging M&A offers announced during 1999-2000. Panel B reports the year-by-year as well as overall sample descriptive statistics for all M&A offers in our final sample. Panel C reports the year-by-year as well as overall descriptive statistics of the litigation cases in our final sample. All variables are defined in Appendix B. Panel A: Offers involving Lawsuits in our Initial Sample

Offer Announcement

Year

Number of

Litigation Offers

Proportion Pre-deal-

completion Litigation

Proportion Delaware

Suits

Proportion Federal Suits

Proportion Class

Action Suits

Proportion Bidder Suits

Proportion Target Suits

Proportion Settled

1999 197 93.91% 45.18% 14.72% 85.28% 5.07% 2.54% 34.27%

2000 176 96.59% 59.66% 3.98% 90.34% 4.55% 1.70% 32.50%

All Offers 373 95.17% 52.01% 9.65% 87.67% 4.82% 2.14% 33.43%

Panel B: All Offers in our Final Sample

Offer Announcement

Year

Number of Offers

Average Offer Size

Proportion Completed Offer

Average Takeover Premium

in Completed Offers

Proportion Top Target Law

Firm

Proportion Litigation

1999 1288 1.17 81.37% 36.51% 17.15% 12.73%

2000 1224 1.07 77.37% 38.80% 16.50% 11.02%

All Offers 2512 1.12 79.42% 37.60% 16.84% 11.90%

Panel C: Offers involving Lawsuits in the Final Sample

Offer Announcement

Year

Number of

Litigation Offers

Proportion Pre-deal-

completion Litigation

Proportion Delaware

Suits

Proportion Federal Suits

Proportion Class

Action Suits

Proportion Bidder Suits

Proportion Target Suits

Proportion Settled

1999 164 95.73% 45.12% 11.59% 87.80% 2.44% 2.44% 33.54%

2000 135 97.04% 54.07% 5.19% 89.63% 5.19% 0.74% 32.09%

All Offers 299 96.32% 49.16% 8.70% 88.63% 3.68% 1.67% 32.88%

54

Table 2 Descriptive Statistics of Litigation Offers

Panel A reports descriptive statistics for M&A lawsuits filed at state and federal courts. Panel B reports descriptive statistics for the different types of M&A lawsuits. All variables are defined in Appendix B. Panel A: Litigation Cases by Court Type

Type Number of

Offers

Proportion Class

Action Suits

Proportion Bidder Suits

Proportion Target Suits

Proportion Settled

Proportion Consideration Paid among Settled Suits

Proportion Completed

Average Takeover Premium

in Completed

Offers

Delaware Suits 147 94.56% 1.36% 0.00% 33.33% 51.02% 76.87% 42.20%

Non-Delaware

State Suits 127 87.40% 3.15% 0.79% 33.33% 31.71% 72.44% 41.92%

Federal Suits 25 36.00% 20.00% 16.00% 28.00% 42.86% 52.00% 63.94%

Panel B: Litigation Cases by Type of Litigation

Type Number of

Offers Proportion

Settled

Proportion Consideration Paid

among Settled Suits

Proportion Completed

Average Takeover Premium

in Completed Offers

Suits challenging Controlling Shareholder

Squeeze-outs 48 41.30% 89.47% 83.33% 46.83%

Suits challenging MBOs 58 31.03% 38.89% 67.24% 32.37%

Bidder Suits 11 18.18% 50.00% 36.36% 70.97%

Target Suits 5 0.00% N/A 20.00% 79.10%

Class Action Suits 259 34.63% 40.45% 74.90% 40.51%

Derivative Suits 8 37.50% 66.67% 87.50% 50.32%

55

Table 3 Offer Features and Outcomes: Univariate Analysis

Panels A, B, C, D and E report the average offer features, lawsuit particulars, and offer outcomes for offers that involved litigation versus offers that did not, for the full sample as well as for various subsample of offers. All variables are defined in the Appendix B. Panel A

All Offers Large Offers only

Litigation Offers Non-Litigation

Offers Litigation Offers

Non-Litigation Offers

Number of Offers 299 2213 235 1020

Intra-Industry Offer (%) 42.47 46.54 44.26 54.41***

Offer Size ($ bn) 3.93 0.74*** 5.00 1.58*

Hostile Offer (%) 10.03 3.48*** 10.21 4.01***

Multiple-Bidder Offer (%) 9.70 3.48*** 8.94 5.49**

Controlling Shareholder Squeeze-outs (%) 16.05 2.58*** 11.06 1.86***

Bidder Minority Stake (%) 12.37 5.69** 9.36 3.63***

Cash Financing (%) 61.41 43.68*** 59.84 38.60***

Target Termination Fee (%) 54.52 32.13*** 62.98 52.06***

Tender Offer (%) 28.43 18.03** 27.66 21.96*

Time to Completion (days) for Completed deals 148.95 93.74*** 146.29 114.01***

Proportion Settled among litigation cases 32.88% N/A 35.19% N/A

Proportion Consideration Paid among Settled Suits 42.27% N/A 42.68% N/A

Completed Deals (%) 72.91 80.30*** 76.59 86.76***

Takeover Premium in Completed Deals (%) 43.38 36.89*** 40.25 39.74

*, **, *** denote significantly different from Litigation Offers at the 10, 5 and 1 percent level respectively.

56

Panel B

Hostile Offers only Controlling Shareholder Squeeze-outs Offers only

Litigation Offers Non-Litigation

Offers Litigation Offers

Non-Litigation Offers

Number of Offers 30 77 48 57

Intra-Industry Offer (%) 60.00 38.96 35.42 40.35

Offer Size ($ bn) 5.53 0.61*** 0.84 0.21*

Hostile Offer (%) N/A N/A 6.25 3.51

Multiple-Bidder Offer (%) 33.33 28.57 2.08 1.75

Controlling Shareholder Squeeze-outs (%) 10.00 2.60 N/A N/A

Bidder Minority Stake (%) 13.33 16.88 N/A N/A

Cash Financing (%) 62.40 75.78 84.90 67.38**

Target Termination Fee (%) 26.67 5.19*** 14.58 5.26*

Tender Offer (%) 40.00 25.97 45.83 26.31**

Time to Completion (days) for Completed deals 171.16 128.33 124.81 120.89

Proportion Settled among litigation cases 13.33% N/A 41.30% N/A

Proportion Consideration Paid among Settled Suits 50.00% N/A 89.47% N/A

Completed Deals (%) 13.33 11.69 83.33 82.46

Takeover Premium in Completed Deals (%) 52.26 16.49** 46.83 34.80*

*, **, *** denote significantly different from Litigation Offers at the 10, 5 and 1 percent level respectively.

57

Panel C

Top-10 Target Legal Advisor Offers

only Top-10 Bidder Legal Advisor Offers

only

Litigation Offers Non-Litigation

Offers Litigation Offers

Non-Litigation Offers

Number of Offers 143 280 100 352

Intra-Industry Offer (%) 38.46 56.79*** 51.00 54.26

Offer Size ($ bn) 5.33 3.52* 8.13 2.20***

Hostile Offer (%) 11.89 4.28*** 14.00 1.99***

Multiple-Bidder Offer (%) 9.70 3.48*** 11.00 4.82**

Controlling Shareholder Squeeze-outs (%) 10.49 7.85 15.00 4.26***

Bidder Minority Stake (%) 14.69 5.00*** 10.00 2.84***

Cash Financing (%) 55.99 36.24*** 56.40 43.99**

Target Termination Fee (%) 48.95 62.86*** 63.00 60.80

Tender Offer (%) 18.18 23.21 35.00 30.97

Time to Completion (days) for Completed deals 165.43 128.19*** 143.84 108.56***

Proportion Settled among litigation cases 26.95% N/A 41.84% N/A

Proportion Consideration Paid among Settled Suits 55.26% N/A 48.78% N/A

Completed Deals (%) 60.84 88.57*** 84.00 92.04**

Takeover Premium in Completed Deals (%) 47.62 40.46** 37.57 37.68

*, **, *** denote significantly different from Litigation Offers at the 10, 5 and 1 percent level respectively.

58

Panel D

High Target-E-Index Offers only High Bidder-E-Index Offers only

Litigation Offers Non-Litigation

Offers Litigation Offers

Non-Litigation Offers

Number of Offers 49 235 35 263

Intra-Industry Offer (%) 55.10 61.70 68.57 60.08

Offer Size ($ bn) 9.19 1.34*** 5.70 0.88***

Hostile Offer (%) 20.41 4.68*** 22.86 1.52***

Multiple-Bidder Offer (%) 20.40 5.11*** 20.00 3.42***

Controlling Shareholder Squeeze-outs (%) 8.16 0.85*** 11.43 4.56*

Bidder Minority Stake (%) 12.24 4.68** 5.71 1.90

Cash Financing (%) 54.76 43.58 42.76 37.22

Target Termination Fee (%) 65.31 43.40*** 65.71 40.68***

Tender Offer (%) 30.61 18.72* 25.71 19.01

Time to Completion (days) for Completed deals 159.00 117.09*** 157.81 115.40**

Proportion Settled among litigation cases 29.17% N/A 20.59% N/A

Proportion Consideration Paid among Settled Suits 35.71% N/A 14.29% N/A

Completed Deals (%) 69.59 73.40 74.28 86.31*

Takeover Premium in Completed Deals (%) 38.52 36.15 39.13 36.05

*, **, *** denote significantly different from Litigation Offers at the 10, 5 and 1 percent level respectively.

59

Table 4 Correlation Matrix

The table reports the pair-wise Pearson’s correlations between different variables used in analysis.

Pre-deal-

completion Litigation

Top Target

Law firm

Top Bidder

Law firm

Top Target Investment

bank

Top Bidder

Investment bank

Stock Financing

Target Termination

Fee

Top Target Law firm 0.3022

Top Bidder Law firm 0.1502 0.2157

Top Target Investment bank 0.1331 0.2329 0.3077

Top Bidder Investment bank 0.1771 0.2741 0.2729 0.2499

Stock Financing 0.0415 0.1010 0.1081 0.1365 0.1072

Target Termination Fee 0.1464 0.2207 0.2605 0.2807 0.2699 0.2298

Tender Offer 0.0872 0.0256 0.1495 0.1395 0.0612 -0.2743 0.2323

60

Table 5 Offer Features and Outcomes: Multivariate Analysis

Table 4A reports the regression coefficients, and the associated z statistics in parenthesis based on heteroskedasticity-consistent industry-clustered standard errors, of logit regression explaining the probability of litigation. Tables 4B and 4C report the regression coefficients, and associated z-statistics (and t-statistics) based on heteroskedasticity-consistent industry-clustered standard errors, for an IV model using the limited information maximum likelihood (LIML) estimation approach, where Pre-deal-Completion Litigation is the endogenous covariate instrumented with Bidder High Litigation Industry and Target High Litigation Industry. Also reported are Pseudo R2 values for logit regression specifications and Adjusted R2 values for OLS regression specifications, and the number of M&A offers over which each regression specification is run. Included in the regressions as controls are βY, a vector of year fixed effects, and βI, a vector of bidder industry fixed effects based on the 10 Fama-French industry classifications. All variables are defined in the Appendix B.

Panel A

Dependent Variable: Litigation

(1) (2) (3) (4)

βY Yes Yes Yes Yes

βI Yes Yes Yes Yes

Offer Size 0.06*** (4.10)

0.06*** (3.95)

0.06*** (3.64)

0.03*** (2.97)

Intra-Industry Offer -0.20

(-1.50) -0.21

(-1.54) -0.22

(-1.60) -0.20

(-1.38)

Hostile Offer 0.93*** (3.43)

0.73*** (2.58)

1.07*** (3.47)

1.06*** (3.45)

Multiple-Bidder Offer 0.56

(1.59) 0.46

(1.31) 0.33

(1.05) 0.23

(0.74) Controlling Shareholder

Squeeze-out 2.18*** (3.23)

2.08*** (3.19)

2.46*** (2.94)

2.25*** (2.86)

Bidder Minority Stake 0.83

(0.84) 0.83

(0.82) 1.05

(1.59) 1.00

(1.33)

Cash Financing 0.01*** (3.96)

0.01*** (4.55)

Target Termination Fee 1.40*** (3.52)

1.05*** (2.89)

Tender Offer 0.01

(0.07) 0.01

(0.05)

Top Target Law firm 1.39*** (3.78)

Top Bidder Law firm 0.30* (1.65)

Top Target Investment Bank 0.18

(0.98)

Top Bidder Investment Bank 0.29

(1.54) Controlling Shareholder Squeeze-out × Offer Size

0.01 (1.08)

0.01 (1.10)

0.01 (1.26)

Hostile Offer × Offer Size 0.01* (1.80)

0.02* (1.83)

0.01 (1.56)

N 2512 2512 2512 2512

Pseudo R2 (%) 14.64 14.98 17.09 23.00

*, **, *** denote significantly different from zero at the 10, 5 and 1 percent level respectively.

61

Panel B

Dependant Variable: Completed Offers

(1) (2) (3) (4)

βY Yes Yes Yes Yes

βI Yes Yes Yes Yes

Pre-deal-completion Litigation -0.47*** (-2.64)

-0.53*** (-2.70)

-0.59*** (-2.90)

-0.69*** (-3.37)

Offer Size 0.01

(1.07)0.01

(1.03)0.01

(0.89) 0.01

(0.33)

Intra-Industry Offer 0.54*** (4.19)

0.55*** (4.28)

0.46*** (3.73)

0.45*** (3.60)

Hostile Offer -2.68*** (-4.55)

-2.66*** (-4.15)

-2.71*** (-4.07)

-2.88*** (-4.34)

Multiple-Bidder Offer -1.74*** (-2.41)

-1.74** (-2.35)

-2.20*** (-3.43)

-2.25*** (-3.76)

Controlling Shareholder Squeeze-out

0.38 (1.14)

0.32 (0.98)

0.45 (1.35)

0.38 (1.16)

Bidder Minority Stake -0.48** (-1.99)

-0.49** (-2.04)

-0.32 (-1.56)

-0.29 (-1.51)

Delaware Suits 0.14 (1.30)

0.14 (1.28)

0.08 (0.71)

Target Suits -1.65 (-0.85)

-0.94 (-0.52)

-1.17 (-0.64)

Bidder Suits -0.24 (-0.24)

-0.77 (-0.76)

-0.86 (-0.93)

Stock Financing -0.01 (-0.44)

-0.01 (-1.19)

Target Termination Fee 1.21*** (3.30)

1.01*** (3.08)

Tender Offer 1.43*** (2.99)

1.31** (2.48)

Top Target Law firm -0.31** (-2.06)

Top Bidder Law firm 0.72*** (3.60)

Top Target Investment Bank 0.55*** (2.69)

Top Bidder Investment Bank 0.60*** (3.14)

N 2512 2512 2512 2512

Pseudo R2 (%) 13.49 14.63 17.67 19.45 *, **, *** denote significantly different from zero at the 10, 5 and 1 percent level respectively.

62

Panel C

Dependant Variable: Takeover Premium in Completed Offers

(1) (2) (3) (4)

βY Yes Yes Yes Yes

βI Yes Yes Yes Yes

Pre-deal-Completion Litigation 4.28*** (2.64)

3.81** (2.50)

3.50** (2.09)

3.37** (2.04)

Offer Size -0.01

(-1.05)-0.01

(-0.90)-0.01

(-1.33) -0.01

(-1.36)

Intra-Industry Offer 0.44

(0.26)0.35

(0.20)0.60

(0.33) 0.64

(0.35)

Hostile Offer -2.45

(-0.64)

-3.99 (-0.97)

-3.29 (-0.77)

-3.12 (-0.74)

Multiple-Bidder Offer 2.05** (2.31)

2.33*** (2.65)

2.48*** (2.87)

2.60*** (3.03)

Controlling Shareholder Squeeze-out

1.03* (1.69)

1.06* (1.71)

1.30* (1.73)

1.57* (1.79)

Bidder Minority Stake -0.53

(-1.58)-0.52

(-1.55)-0.30

(-0.88) -0.54

(-1.51)

Delaware Suits -1.11 (-0.68)

-1.08 (-0.67)

-0.97 (-0.60)

Target Suits 4.99*** (4.61)

4.59*** (4.18)

4.20*** (3.54)

Bidder Suits 1.66 (0.87)

1.74 (0.86)

1.85 (0.87)

Stock Financing 0.03* (1.94)

0.04** (2.02)

Target Termination Fee 1.33*** (2.71)

1.49*** (3.59)

Tender Offer 0.90* (1.68)

0.99* (1.91)

Top Target Law firm 2.56** (1.99)

Top Bidder Law firm -0.90 (-0.88)

Top Target Investment Bank 0.64 (0.26)

Top Bidder Investment Bank -0.08 (-0.04)

N 1995 1995 1995 1995

Adjusted R2 (%) 5.42 5.54 5.87 5.93 *, **, *** denote significantly different from zero at the 10, 5 and 1 percent level respectively.

63

Table 6 Shareholder Litigation Settlements and Consideration Paid upon Settlements

This table reports the regression coefficients, and the associated z statistics in parenthesis based on heteroskedasticity-consistent industry-clustered standard errors, for an IV model using the limited information maximum likelihood (LIML) estimation approach, where Completed is the endogenous covariate instrumented with Bidder High Litigated-offer-Completion Industry and Target High Litigated-offer-Completion Industry. The dependant variables are Settled (in Panel A) and Consideration Paid (in Panel B), indicator variables for litigation settlements and consideration paid upon settlement, respectively. The regressions are run over all M&A offers that entail shareholder litigation: class action lawsuits and derivative lawsuits, for which information on whether the suit settled is also available. Also reported are Pseudo R2 values and the number of M&A offers over which each regression specification is run. Included in the regressions as controls are βY, a vector of year fixed effects, and βI, a vector of bidder industry fixed effects based on the 10 Fama-French industry classifications. All variables are defined in the Appendix B. Panel A

Dependant Variable: Settled

(1) (2) (3) (4) βY Yes Yes Yes Yes

βI Yes Yes Yes Yes

Completed 1.92*** (5.06)

1.91*** (4.92)

2.02*** (4.97)

1.79*** (5.66)

Offer Size -0.01

(-0.82)-0.01

(-0.72)-0.01

(-1.13) -0.01

(-1.32)

Intra-Industry Offer 0.47** (2.42)

0.44** (2.17)

0.44** (2.14)

0.43** (2.05)

Hostile Offer -0.67

(-0.99)-0.69

(-1.25)-0.68

(-1.23) -0.84

(-1.43)

Multiple-Bidder Offer 0.67

(1.24)0.62

(1.13)0.40

(0.95) 0.29

(0.80)Controlling Shareholder

Squeeze-out 0.41*** (2.77)

0.45*** (2.95)

0.67*** (4.48)

0.54*** (3.99)

Bidder Minority Stake -0.24

(-1.51)-0.27

(-1.60)-0.33

(-1.63) -0.27

(-1.60)

Delaware Suits -0.21 (-1.54)

-0.24 (-1.61)

-0.23 (-1.59)

MBO -0.27 (-0.66)

-0.27 (-0.56)

-0.37 (-0.77)

Cash Financing 0.01 (0.06)

0.01 (0.12)

Target Termination Fee 0.14 (0.34)

0.21 (0.48)

Tender Offer -0.03 (-0.30)

-0.11 (-1.45)

Top Target Law firm -0.32*** (-2.81)

Top Bidder Law firm 0.77*** (3.04)

Top Target Investment Bank 0.40 (1.35)

Top Bidder Investment Bank 0.18 (0.74)

Controlling Shareholder Squeeze-out × Tender Offer -0.71**

(-2.09) -0.76** (-2.38)

N 262 262 262 262

Pseudo R2 (%) 13.20 13.50 13.75 14.33 *, **, *** denote significantly different from zero at the 10, 5 and 1 percent level respectively.

64

Panel B

Dependant Variable: Consideration Paid

(1) (2) (3) (4) βY Yes Yes Yes Yes

βI Yes Yes Yes Yes

Completed 1.30** (2.10)

1.30** (2.14)

1.57** (2.06)

1.35** (2.15)

Offer Size -0.01

(-0.29)-0.01

(-0.31)-0.01

(-0.40) -0.01

(-1.03)

Intra-Industry Offer 0.14

(0.87)

0.12 (0.76)

0.02 (0.91)

0.11 (0.62)

Hostile Offer -0.08

(-0.16)-0.10

(-0.19)-0.15

(-0.32) -0.62

(-1.56)

Multiple-Bidder Offer 0.13

(0.15)0.11

(0.12)0.36

(0.45) 0.57

(0.82)Controlling Shareholder

Squeeze-out 1.77*** (4.08)

1.73*** (4.03)

1.70*** (4.13)

1.69*** (3.97)

Bidder Minority Stake -0.19

(-0.44)-0.19

(-0.42)-0.34

(-0.77) -0.36

(-0.84)

Delaware Suits 0.01 (0.07)

0.10 (0.41)

0.01 (0.06)

MBO 0.16 (0.73)

0.01 (0.01)

0.12 (0.99)

Cash Financing -0.01* (-1.82)

-0.02** (-2.38)

Target Termination Fee -0.63 (-0.98)

-0.81 (-1.05)

Tender Offer -0.04 (-0.06)

-0.25 (-0.28)

Top Target Law firm 1.08*** (2.90)

Top Bidder Law firm 1.04*** (2.89)

Top Target Investment Bank 0.25 (1.50)

Top Bidder Investment Bank 0.08 (0.13)

Controlling Shareholder Squeeze-out × Tender Offer 0.03

(0.06) 0.02

(0.04)N 262 262 262 262

Pseudo R2 (%) 15.66 15.70 17.33 21.23 *, **, *** denote significantly different from zero at the 10, 5 and 1 percent level respectively.

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Appendix A List of Top 10 Target and Bidder Law firms and Investment Banks, based on league-table ranks from Thomson Financial’s SDC Mergers and Corporate Transactions database.

Top-10 Target Law Firms Top-10 Bidder Law Firms

1999 2000 1999 2000

1 Simpson Thacher Simpson Thacher Sullivan & Cromwell Sullivan & Cromwell

2 Skadden Arps Skadden Arps Skadden Arps Simpson Thacher

3 Wachtell Lipton Shearman & Sterling Simpson Thacher Cleary Gottlieb

4 Sullivan Cromwell Sullivan Cromwell Shearman & Sterling Skadden Arps

5 Dewey & LeBoeuf Wachtell Lipton Dewey & LeBoeuf Davis Polk

6 Richards Layton Dewey & LeBoeuf Davis Polk Shearman & Sterling

7 Shearman & Sterling Morris Nichols Wachtell Lipton Dewey & LeBoeuf

8 Cravath Swaine Freshfields Bruckhaus Cravath Swaine Wachtell Lipton

9 Fried Frank Davis Polk Fried Frank Cravath Swaine

10 Morris Nichols Richards Layton Cleary Gottlieb Freshfields Bruckhaus

Top-10 Target Investment Banks Top-10 Bidder Investment Banks

1999 2000 1999 2000

1 Goldman Sachs Goldman Sachs JP Morgan Goldman Sachs

2 Morgan Stanley JP Morgan Merrill Lynch Merrill Lynch

3 JP Morgan Morgan Stanley Morgan Stanley JP Morgan

4 Credit Suisse Merrill Lynch Goldman Sachs Morgan Stanley

5 Merrill Lynch Credit Suisse Citicorp Credit Suisse

6 Citicorp Citicorp Credit Suisse Citicorp

7 Lazard Lazard UBS UBS

8 UBS UBS Deutsche Bank Lazard

9 Barclays Capital Barclays Capital Barclays Capital Deutsche Bank

10 Dresdner Kleinwort Deutsche Bank Lazard Dresdner Kleinwort

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Appendix B

Definitions of Variables

Lawsuit Variables Description

Litigation As indicator variable for M&A offers in which there was litigation.

Delaware Suits An indicator variable for Delaware cases.

Other State Suits An indicator variable for lawsuits filed in state courts other than Delaware.

Federal Suits As indicator variable for federal jurisdiction cases, as opposed to State jurisdiction cases.

Settled An indicator variable for settled cases, as opposed to cases dismissed with or without prejudice.

Consideration Paid An indicator variable for litigation offers that are settled in court and in which consideration is paid.

Class Action An indicator variable for Class Action law suit.

Target Suit An indicator variable for litigation initiated by the target firm.

Bidder Suit An indicator variable for litigation initiated by the bidder firm.

Offer Variables Description

Completed Offer

An indicator variable that takes the value of 1 for successfully completed acquisition offers and 0 otherwise.

Takeover Premium

The price per share paid by an acquirer in completed deals for a target firm’s shares relative to the target’s pre offer-announcement stock price 1 week prior to the announcement date, as per the Thomson Financial Mergers and Corporate Transactions database.

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Intra-Industry Offer An indicator variable that takes the value of 1 when the bidder and target firms are from the same industry (using the 2-digit SIC code) and 0 otherwise.

Offer Size The value of the transaction (in $ bn), which is the total value of consideration paid by the acquirer for the target, excluding fees and expenses.

Larger Offer Offers with Offer Size greater than or equal to the sample median offer size, which is $80 million.

Hostile Offer An indicator variable set equal to 1 for hostile bids and “Unsolicited” offers, as reported in the SDC database and 0 otherwise.

Multiple-Bidder Offer An indicator variable set equal to 1 for offers involving competing bidders, and 0 otherwise.

Controlling Shareholder Squeeze-out An indicator variable set equal to 1 for offers where a bidder had a toehold of 50% or more in the target firm before the announcement date, and 0 otherwise.

Bidder Minority Stake An indicator variable set equal to 1 for offers where a bidder had a toehold of 5% or more, but less than 50%, in the target firm before the announcement date, and 0 otherwise.

Stock Financing The percentage of the total offer that is in stock.

Cash Financing The percentage of the total offer that is in cash.

Tender Offer An indicator variable set equal to 1 for tender offers, and 0 otherwise.

Target Termination Fee An indicator variable set equal to 1 for offers with a termination fee provision payable by target firms to bidders, and 0 otherwise.

Time to Completion The time (in number of days) between deal announcement and deal completion.

MBO An indicator variable for management buyout deals.

High Target-E-Index

Indicator variable for Targets whose BCF E-Index measure of anti-takeover provisions as at the time of offer announcement higher than the median score of 2 taken from Lucian Bebchuk’s database, denoting the more protected target firms.

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High Bidder-E-Index

Indicator variable for Bidders whose BCF E-Index measure of anti-takeover provisions as at the time of offer announcement higher than the median score of 2 taken from Lucian Bebchuk’s database, denoting the more protected bidder firms.

High Target-GIM firms

Indicator variable for Targets whose GIM measure of anti-takeover provisions as at the time of offer announcement equal to or higher than the median GIM score of 9 taken from IRRC database, denoting the more protected target firms.

High Bidder-GIM firms

Indicator variable for Bidder firms whose GIM measure of anti-takeover provisions as at the time of offer announcement equal to or higher than the median GIM score of 9 taken from IRRC database, denoting the more protected bidder firms.

Dual-Share-Class Target Indicator variable for Target firms with dual class shares, taken from Andrew Metrick’s web site.

M&A Intermediary Variables Descriptions

Top Bidder (Target) Law Firm

An indicator variable that takes the value of 1 for a law firm that is in the top 10 annual league table rankings of bidder (target) legal advisors in the previous year (to avoid any look-ahead bias), based on the value of M&A offers that a bidder (target) legal advisor advised on. Each law firm is given full credit for each offer for which it provides advisory services. League tables are separately calculated for bidder and target legal advisers.

Top Bidder (Target) Investment Bank

An indicator variable that takes the value of 1 for an investment bank that is in the top 10 annual league table rankings of bidder (target) financial advisors in the previous year (to avoid any look-ahead bias), based on the value of M&A offers that a bidder (target) financial advisor advised on. Each investment bank is given full credit for each offer for which it provides advisory services. League tables are separately calculated for bidder and target financial advisers.

Instrumental Variables Descriptions

Bidder (Target) High Litigation Industry

An indicator variable that takes a value of 1 in the current year for the 2-digit SIC codes of top 10 bidder (target) industries where an M&A bid has been litigated in the past 3 years.

Bidder (Target) High Litigated-Offer Completion Industry

An indicator variable that takes a value of 1 in the current year for the 2-digit SIC codes of top 10 bidder (target) industries where an M&A bid has been litigated but still successfully completed in the past 3 years.