Nuisance Lawsuits Dog Tech Mergers

Lawsuit legal gavel

Just minutes after Yahoo! (NSDQ: YHOO) announced today’s acquisition of ad firm interclick came the news that a law firm was investigating whether interclick’s board had shortchanged its shareholders. Like patent trolls, these shareholder “investigations” have become an unavoidable legal landmine for the tech industry.

Levi Korinsky, the firm that filed the suit, claims the interclick board may have breached its duty to shareholders by selling at $9/share when one analyst had valued the company at $10/share.

This year alone, it seems like every significant tech merger that involves the acquisition of a public company has been followed by a shareholder suit. After eBay’s $2.4 billion acquisition of GSI Commerce in March, for instance, the deal was snared by a lawsuit that settled a short time later. Ditto ISP Windstream’s $2.3 billion acquisition of telecom firm Paetec. And “concerned” Motorola (NYSE: MMI) Mobility shareholders this August sued to stop Google (NSDQ: GOOG) from paying $12 billion to acquire the floundering company.

These lawsuits typically follow a four-part formula:

  1. A class action firm stalks a potential merger involving a public company and then strikes with a class action threat as soon as the deal closes, stating the board of the target company should have held out for a few dollars more. And if the deal falls through, the firm can sue the board for rejecting it.
  2. The law firm ferrets out shareholders to put their name on the suit. These “named plaintiffs” typically stand to gain a small cash pay-out and steak dinners at the law firm’s favorite restaurant.
  3. The law firm quickly obtains a settlement from the companies, which are anxious to conclude the merger and avoid court delays.
  4. The settlement obliges the target company to publish a notice or engage in some other formality. It also obliges them to provide for the plaintiff shareholders’ legal fees (in other words, pay the law firm hundreds of thousands or millions of dollars).

The merger lawsuit phenomenon first came to public attention in January when the Wall Street Journal reported that the number of securities-related class actions had spiked from 27 in 2006 to 216 in 2010. Today’s Yahoo! announcement suggests that the trend is not abating and that the technology sector is a prime target.

There is, of course, a place for these class actions — for instance, when a board conspires to sell a company on the cheap in return for personal gain. But there is no evidence this happened in the Yahoo! deal or in the Google acquisition (Motorola Mobility investors are probably still turning cartwheels..).

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