July/August 2009 / Features
M&A Foments Litigation
The author reviews issues giving rise to post-M&A litigation. He describes causes of action, defenses and counterclaims, and how the parties support their positions on liability.
When a target is being acquired principally for its intellectual property, litigation often concerns exclusivity of those assets. Another frequently litigated area concerns fraudulent or negligently presented financial statements. Plaintiff buyers typically assert causes of action based on breach of contract or misrepresentation. Targets may counterclaim, asserting that damage sustained by the buyer was caused by its mismanagement.
“Virtual data rooms” created by targets concerning their legal, business, tax and accounting affairs are a frequent source of litigation. Buyers should insist that information on relevant matters be disclosed.
If a plaintiff carries its burden of proof and demonstrates liability, it must quantify and prove damages. Typically, two kinds of damages are sought in M&A due diligence lawsuits. Dollar-for-dollar recovery is the norm. It compensates plaintiffs for damages that flow through the balance sheet. Damages based on a multiple of P/E might be applied where specific contractual language mandates such an approach.
Outcomes in due diligence litigation are highly fact sensitive, so parties are well advised to comb their own records before litigation to determine the strengths and weaknesses of their positions.
