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Understanding Merger Objection Lawsuits

David H. Schwartz, INC Aug. 24, 2022

In a merger and acquisition (M&A) transaction, it’s not unusual for the shareholders of the target company – the one being acquired or merged with by the other entity in the transaction – to feel that the value offered is insufficient. In other words, the price for their company and the shares they hold are being undervalued.

The target company shareholders can then launch a lawsuit, or even lawsuits, based on federal and state laws that challenge the directors and officers (D&O) of their company to disclose how they arrived at their valuation. These lawsuits might aim for monetary damages to shareholders, but most seek injunctive relief, requiring D&O to take certain actions to satisfy shareholders that their best interests are being represented.  

If your company is set to be acquired under terms a shareholder might find insufficient or insufficiently justified, or if you as a director or officer of a company being acquired are facing a merger lawsuit, bring your concerns to the Law Offices of David H. Schwartz, INC, which serves clients in the Greater San Francisco Bay Area.

Attorney David H. Schwartz has more than 45 years of experience in corporate litigation cases and will bring his knowledge and resources to help you with your merger objection lawsuit, no matter which side you’re on. 

Grounds for Filing an M&A Lawsuit 

Shareholder merger claims are available under both federal and state law. These claims often challenge not only the deal price, but also the disclosures being offered by the target directors and officers, along with the process followed by the target company.   

Under federal law, most merger objection lawsuits rely on the Securities Exchange Act of 1934 (the Exchange Act). Section 14(a) of the Exchange Act sets disclosure standards by the target company in a merger. 

A lawsuit can challenge that the disclosures were inadequate. The lawsuit must show that the proxy statement provided to shareholders failed to disclose information required under 14(a), or that the proxy statement contained materially false or misleading statements.

A federal lawsuit can also be brought under the Securities Act of 1933 if the transaction involves the issuance of new securities.

State merger objection lawsuits are based on a breach of fiduciary duty, whether it be the duty of care or the duty of loyalty. The duty of care requires the fiduciaries (D&O) to make use of all available material to come to an informed and deliberate decision. The duty of loyalty requires that D&O act in the best interests of the company and the shareholders and refrain from doing any harm.

To prove a breach of the duty to care, the lawsuit must show that the fiduciaries were grossly negligent and failed to consider all relevant and material information. A duty of loyal claim needs to show that the decision was tainted by a conflict of interest, whereby a director acted in bad faith or a controlling shareholder put his interests above those of the minority shareholders.

Some states, including California, provide that minority shareholders unhappy with the price or consideration being offered in the merger may exercise dissenter’s rights to have their shares purchased at fair market value. In many cases, this is the only remedy available to a shareholder unhappy with the merger terms.

Steps to Take as a Shareholder 

If you suspect the proxy statement offered for the proposed merger transaction fails to meet required standards, or that the deal price itself is insufficient, you need to consult with a knowledgeable corporate litigation attorney who can help you parse the statement and determine whether there has been a breach of fiduciary duty or a violation of the Exchange Act. A class action lawsuit can then be considered on behalf of the shareholders. 

Seek Trusted Legal Counsel 

Merger objection lawsuits are generally contingent upon the counsel and guidance of the attorneys that each side hires. Often these lawsuits have a short court life because the target company and its directors are focused on bringing the transaction to fruition.

If you are a shareholder (or a director) uncomfortable with the terms being offered in a merger, the guidance and counsel of an experienced corporate litigation attorney is essential. If you’re in the Greater San Francisco Bay Area, rely on the Law Offices of David H. Schwartz, Inc. With his 45-plus years of handling corporate litigation cases, Attorney Schwartz will help you pursue or defend against a merger acquisition lawsuit.  

The Law Offices of David H. Schwartz, Inc. proudly serves clients in both Northern and Southern California.