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Class Actions Are an M&A Deal Killer

September 19, 2019

Any time one company seeks to merge with or acquire another, the acquiring company is looking for a few critical factors. Strong financial potential, predictable expenses and an absence of risk are positive indicators. Having only one class action lawsuit filed against the target organization, however, can throw those indicators into a tailspin. Even if the company can settle the case, there is a significant risk that the settlement goes viral due to various settlement websites that promote access to free money by filing claims, and the awareness that is created by free media overall. The increased volume of claims creates unpredictable financial outcomes.

There are various options. Settling the litigation and containing the exposure appears to be a simple solution but in practice is often unworkable. Without a final judgment, which can take years, litigation uncertainty remains. Setting aside a large litigation escrow or a specific litigation indemnity presents its own unique problems. There is always tension between the parties on the amount of escrow. When the seller is doing an asset deal and the funds are being distributed to the stakeholders, specific litigation indemnity loses its appeal.

When settlement is not possible or advisable, but the risk is impeding a deal, the buyer and seller can obtain litigation buyout risk transfer. Using this approach, the parties to the M&A transaction obtain certainty in the uncertain situation of class action litigation, allowing the deal to proceed even with litigation obstacles.

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