Frank C. Bonaventure Jr. has advice for any company seeking to grow through an acquisition.
“When you’re doing a merger, part of the planning process is knowing you’re probably going to get sued,” said Bonaventure, a veteran mergers and acquisitions lawyer.
That is exactly what happened to Old Line Bancshares, of Bowie, after it announced Sept. 10, 2012, that it would be acquiring the parent company of Washington Savings Bank. Shareholders of Bowie-based WSB Holdings Inc. filed suit two weeks later, alleging a breach of fiduciary duty even though it would be another two months before Old Line Bank would file the paperwork with the U.S. Securities and Exchange Commission with details about the proposed merger.
Old Line Bank closed the deal in May, paying the originally proposed share price of $6.09. The shareholders’ lawsuit, filed in Prince George’s County Circuit Court, was settled in June and resulted in several revisions to the paperwork filed with the SEC, mostly related to the dates and history of talks leading up to the merger.
The plaintiffs’ lawyers then filed a request for $400,000 in attorneys’ fees.
Some companies decide to settle attorneys’ fees disputes out of concern the litigation will hold up the merger and harm their reputations, said Bonaventure, the Baltimore-based chairman of Ober, Kaler, Grimes & Shriver P.C.’s Financial Institutions Group. But a settlement might result in unintended consequences, he said.
“There is a strong incentive to push these cases aside and throw money at the issue,” he said. “The more you do that, the more you encourage lawsuits.”
Old Line Bank, through Bonaventure and colleague Harold G. Belkowitz, decided to challenge the attorneys’ fees request.
“This lawsuit has, from the outset, been nothing but a baseless strike suit to disrupt a bank merger under the guise of a class action and to pad the pockets of Plaintiff’s counsel — without providing any value to actual Plaintiffs,” their motion in opposition states.
Judge Crystal D. Middlestaedt agreed, ruling from the bench last month against awarding attorneys’ fees.
“[T]he Court determines that the lawsuit was not meritorious based on the timing of the filing and the lack of factual basis for it,” Middlestaedt ruled from the bench Nov. 12. “It also is clear that in light of the filing that there was really nothing that was uncovered, nothing that changed. It appeared to the Court that this filing was made before there was any real reason for such filing.”
To Bonaventure and Belkowitz, the ruling was vindication for what they argue is a far-too-uncommon challenge to the far-too-common lawsuits objecting to mergers, where the shareholders’ lawyers, not the shareholders, end up with money.
“It’s an item that has developed as low-hanging fruit,” said Belkowitz, a principal in Ober|Kaler’s Washington, D.C., office. “Companies are anxious to settle to let their transactions go through.”
But it is the companies’ choice to dangle the low-hanging fruit to complete the transaction, according to Randall J. Baron, a San Diego plaintiffs’ lawyer who has obtained billions for shareholders in lawsuits challenging mergers and acquisitions. The deals involve three parties, one of which, the shareholders, is not involved in the negotiations.
“Shareholders only get the sales pitch from the [companies’] lawyers,” said Baron, a partner with Robbins Geller Rudman & Dowd LLP, who is not involved in the Old Line Bank case. “I find it a fallacy to say, ‘Trust us, it’s all good.’”
Shareholders nationwide last year challenged 93 percent of mergers and acquisitions valued over $100 million and 96 percent of deals valued at more than $500 million, according to a February report from Cornerstone Research, a commercial litigation research firm. The lawsuits were filed an average of two weeks after the merger was announced.
A January report by finance professors at the University of Notre Dame and Ohio State University found that the percentage of litigation in deals involving publicly traded companies valued at more than $100 million increased from 39.3 percent in 2005 to 91.7 percent last year.
Most of the lawsuits cited in the Cornerstone report settled, and in more than 80 percent of the settlements, the only relief to shareholders was additional disclosures, according to the report, as in the Old Line case.
Olga Koumrian, a principal at Cornerstone and co-author of the report, said 90 percent of shareholder lawsuits filed last year ended up recovering attorneys’ fees. The average fees were $725,000, although Koumrian said three were $1 million or more. (The finance professors’ report found the median attorneys’ fees in settlements was $595,000.)
Most of the attorneys’ fees requests are settled before a deal closes, with less than a third continuing after the merger, “a sign of fighting,” according to Koumrian.
“Settling versus fighting a lawsuit — you have to think about what will cost more,” Koumrian said.
Sending a message
Donald J. Enright, the shareholders’ lawyer, declined to comment on the case. Enright is a partner at Levi & Korsinsky LLP in Washington, a national firm that specializes in representing shareholders.
Enright has filed dozens of lawsuits in Maryland, according to court records, and reached settlements with many that included attorneys’ fees. Such fees must be approved by a judge taking into consideration the best interest of the plaintiffs’ class, according to Belkowitz. The fees are usually granted without much discussion, he added.
Belkowitz said the ruling in Old Line Bank’s favor might encourage other companies “not to roll over” in the face of similar lawsuits.
“It sent a clear message that these cases will not be tolerated when filed as a knee-jerk reaction to a merger announcement,” he said.
Baron, the plaintiffs’ lawyer, said such rulings devalue good cases and make them harder for shareholders to win.
“These judges are skeptical of these cases to begin with,” he said. “I do not like lawyers who are not looking for real value to litigate these cases.”