What Motorola settlement says about shareholder M&A litigation

November 10, 2011

With very little fanfare, Motorola Mobility announced Monday that it has reached a memorandum of understanding to resolve shareholder litigation that might have stood in the way of a vote on Google’s proposed $12.5 billion all-cash acquisition of the company. The memo is, alas, not public, so we don’t know just what the settlement entails, or how much the plaintiffs’ lawyers who challenged the deal will get in fees. Motorola Mobility did file an 8-K amending its proxy materials, giving shareholders marginally more information about (among other things) how the Google deal came together and what kind of equity awards Motorola officers will receive. These relatively insignificant disclosure amendments are a typical ending for the rash of M&A shareholder suits that have broken out in the last few years; it’s a pretty good bet that, in this case, the additional disclosures aren’t going to sway very many Motorola Mobility shareholders when they vote on the Google deal on November 17.

So why am I highlighting an unremarkable settlement that basically amounts to a litigation footnote in a blockbuster $12.5 billion tech deal? Because the Motorola Mobility shareholder M&A litigation is a case study in the weird, private regulatory system that’s evolved as a check on deal activity. In rare instances, when plaintiffs’ lawyers uncover shady behavior by deal participants, shareholders wind up with sweetened offers. But much more often — as in the Motorola Mobility case — the primary beneficiaries of this M&A scrutiny are lawyers: both the plaintiffs’ lawyers who say they have a right to make sure insiders were looking out for shareholders and the defense lawyers representing those insiders.

Shareholder M&A litigation amounts to a “deal tax” companies pay in order to assure their equity holders that the board and its advisers fulfilled their duties. And that leads to a question that’s previously arisen in litigation over cigarettes and guns: do we want private lawyers to do what public regulators seemingly can’t or won’t?

Here’s the background: On August 15, Google announced an all-cash deal to acquire Motorola Mobility for $12.5 billion, or $40 a share. That price represented a whopping 63 percent premium for Motorola Mobility’s shareholders, but Google was considered to be under such intense pressure to acquire the company’s patent portfolio that it was willing to tack on a near-record sweetener to assure the support of Motorola Mobility’s shareholders.

Seems like a pretty generous deal, right? Wrong, according to the 16 — 16! — shareholder class actions filed in the wake of Motorola Mobility’s announcement. These are the times we live in, when a deal that offers shareholders a guaranteed 63 percent windfall on their investment is regarded as suspect.

Of course, the purported class actions were filed in a variety of jurisdictions. The first suit, as Reuters’ Tom Hals reported, was a derivative case in Cook County, Ill., the headquarters of Motorola Mobility’s former parent, Motorola. Three additional class actions followed in Cook County Circuit Court. Another eight were filed in Circuit Court in Lake County, Ill., where Motorola Mobility is based. The Delaware Chancery Court ended up with three parallel class actions, and the 16th suit was filed in Chicago federal court. As Motorola Mobility explained in an Oct. 14 proxy statement, all of the class actions played a variation on the same theme: the company, its board, and (according to almost all of the suits) Google had breached (or abetted a breach) their duty to shareholders. The suits all sought to enjoin a vote on the deal by Motorola Mobility shareholders.

Wachtell, Lipton, Rosen & Katz, which represented Motorola Mobility in negotiations with Google and in the ensuing shareholder litigation, moved to consolidate the injunction class actions in one venue. The various plaintiffs’ firms that filed cases eventually agreed that the litigation would proceed in Cook County, with Robbins Geller Rudman & Dowd leading the way. (Interestingly, such other big securities class action players as Grant & Eisenhofer, Bernstein Litowitz Berger & Grossmann, and Labaton Sucharow sat this one out.)

Randall Baron of Robbins Geller, who won Delaware Chancery kudos for his work in exposing Barclays’ conflict of interest in the Del Monte case, has told me that these M&A injunction suits are a bit of a question mark when they’re filed. Plaintiffs’ firms often don’t know, until they’ve obtained discovery, whether the board and its advisers acted properly in agreeing to a deal. In the Del Monte and J. Crew class actions, for instance, shareholder counsel turned up evidence that led to enhanced offers.

It’s not clear from the Cook County docket how much discovery Robbins Geller and the other plaintiffs firms that sued Motorola Mobility conducted, and Baron and two other Robbins partners didn’t respond to my requests to discuss the litigation. It appears from the docket that most of the litigation was procedural, although a hearing was scheduled before the Cook County judge on Nov. 8, the day Motorola announced the memorandum of understanding.

The 8-K disclosing changes in Motorola Mobility’s proxy statement on the Google deal includes a paragraph explaining that Motorola Mobility shareholder Carl Icahn tried to negotiate for a portion of the reverse-breakup fee the company will receive if the deal doesn’t go through, but the board turned him down, saying it wasn’t willing to treat Icahn differently than other shareholders. The filing also discloses details of the back-and-forth between Motorola’s Wachtell lawyers and Google’s counsel at Cleary Gottlieb Steen & Hamilton over the termination and reverse-termination fees and equity grants to Motorola execs. There’s also an additional disclosure of the $21 million in fees Motorola Mobility and its former parent have paid its financial adviser, Centerview, in the last two years.

As I mentioned, we don’t know yet how much Robbins and its co-counsel will receive as compensation for obtaining these additional disclosures, which seem, if anything, to reinforce the good faith of Motorola Mobility’s board in reaching a deal that’s apparently a boon to shareholders. (Robbins Geller’s Baron did tell me, in an email, that the firm intends to pursue damages against the Motorola Mobility defendants though he didn’t respond to my follow-up request for details.) We’ll never know how much the company paid Wachtell to defend the shareholder litigation, but you can be sure Wachtell’s work doesn’t come cheap.

You could limit the question of whether the disclosures the Motorola Mobility shareholders obtained were worth the cost, but I think there’s a more fundamental question this case raises. Why do we have so little faith in the integrity of corporate boards — and of our regulators’ ability to oversee their conduct — that shareholder lawyers are willing to challenge even a deal that offers a rich premium to equity owners?

There’s got to be a better way.

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