Opinion

Alison Frankel

Will old M&A class settlements tank private equity collusion case?

By Alison Frankel
January 29, 2014

In his latest update on class actions filed in the wake of deal announcements, Dealbook’s Deal Professor Steven Davidoff (whose day job is teaching law at Ohio State) found that in 2013, shareholder suits followed almost all – 97.5 percent – deals of more $100 million. That’s not quite as inevitable as night following day but it’s getting there, especially when you consider that the rate of post-M&A class action filings is up from 91.7 percent in 2012 and 39.3 percent in 2005. Companies grumble all the time that these suits are nothing more than a “deal tax,” a sort of legal extortion racket by plaintiffs lawyers whose true motive is not enhancing shareholder value but skimming millions in fees for holding up transactions with silly claims.

Regardless of the merits of that argument, I’m sure that when shareholders in seven companies acquired by private equity funds in the early 2000s settled M&A class actions, they never imagined that those settlements could come back and complicate a completely different case. Nor could the settling defendants have imagined that their deal-tax settlements could very well shield them from facing an antitrust collusion class action and its attendant treble damages.

That would be the unintended consequence of M&A shareholder settlements if U.S. District Judge William Young of Boston agrees with Bain Capital, Blackstone, KKR, Goldman Sachs and two other private equity firms that former shareholders in eight companies that changed hands in leveraged buyout deals cannot be certified as a class because of broad releases by shareholders in seven of the deals. In their recently filed brief opposing class certification, the private equity defendants assert that the previous judge in the case, now retired Edward Harrigan, already ruled that shareholders who sold stock in the various deals cannot introduce evidence from those transactions against defendants they released from liability in M&A settlements. As a result of that ruling, the private equity funds argue, the plaintiffs’ evidence of the funds’ alleged overarching collusion to suppress prices is a patchwork, with different plaintiffs permitted to make claims against different defendants in different deals, all depending on which plaintiff released which defendants in which LBO.

That evidentiary muddle, according to the private equity funds, is antithetical to class certification. It means that shareholders cannot meet the requirement that common issues predominate over individual issues, they argue. It also complicates the question of whether name plaintiffs can adequately represent the class because they’ve released various claims against various defendants through M&A settlements. Finally, the private equity funds point out, the releases would create a managerial quagmire if the case were to go to trial, with the judge constantly having to remind jurors that certain evidence doesn’t apply to certain shareholders in certain deals involving certain defendants. (If my difficulty in even explaining the complications is any indicator, a jury would most definitely struggle to keep it all straight.)

Shareholder lawyers anticipated the private equity argument about M&A class action releases in their class certification brief, filed last October. They assert that none of the defendants has been released in every deal in the case, so each is subject to their theory of overarching collusion to suppress LBO prices. Notwithstanding the releases from M&A class actions, they argue, they’re permitted to introduce evidence of collusion across each of the deals. And besides, they claim, the releases have a common impact on the class, and will impact just the allocation of damages to shareholders in each of the transactions in the case.

It is, of course, rare for defendants in M&A class actions to face a second round of shareholder suits related to the very same deals. The key precedent that the private equity firms rely upon in opposing class certification, In re The Prudential Insurance Company, involved the impact of releases in policyholder class actions, not M&A class releases. But last June, as my Reuters colleague Nate Raymond reported, U.S. District Judge Naomi Reice Buchwald of Manhattan did cite previous releases from M&A litigation when she dismissed a securities fraud class action against Student Loan Corporation, holding that the two lead plaintiffs gave up their claims in a $10 million Delaware case stemming from Discover Financial’s acquisition of the company.

So maybe those deal-tax M&A class action settlements aren’t such a nuisance for defendants after all.

I reached out to class counsel Christopher Burke of Scott + Scott and Craig Wildfang of Robins, Kaplan, Miller & Ciresi but didn’t hear back. Goldman Sachs counsel Richard Pepperman of Sullivan & Cromwell and KKR counsel Joseph Tringali of Simpson Thacher & Bartlett declined to comment.

I should point out that the private equity defendants also raise class certification defenses based on the U.S. Supreme Court’s ruling last term in Comcast v. Behrend, arguing that the plaintiffs haven’t put forward a classwide theory of damages.

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