U.S. shareholder lawyers are pouncing on private equity buyouts of public companies, bringing a string of lawsuits claiming the deals are unfair to investors and sometimes only serve to enrich top executives.
Private equity has become a hot area for plaintiffs' lawyers, who have challenged buyouts at companies including Lear Corp.
Typically in these cases, shareholders argue that managers accept low-ball offers because they have cut lucrative deals for themselves with the buyers that might allow them to continue running the company and get an equity stake in the new private entity.
"You have private equity getting into bed with management," said shareholder lawyer Seth Rigrodsky. "We are very concerned about the process in which these companies are being sold."
Rigrodsky's firm, Rigrodsky & Long, represents shareholders in Delaware Chancery Court challenging a $2.86 billion buyout offer for auto parts maker Lear by billionaire Carl Icahn.
Also in Delaware, where many corporate disputes are litigated, the firm represents investors suing baseball trading card company Topps, which has agreed to a $385 million buyout from an investor group led by former Walt Disney
Corporate lawyers say that while there has been an explosion of private equity and management-led buyouts of public companies, there is not much new legally about the current crop of lawsuits. They say shareholders frequently challenge mergers, mainly on the argument that the price is inadequate, but that these suits face high hurdles in court.
Private equity firms have done more than $420 billion of buyouts globally this year, more than three times the amount for the same period last year, according to merger data tracker Dealogic.
Institutional investors who bring these suits contend that companies often have not adequately sought out other bids before agreeing to be bought out.
"These suits are an effective tool to make sure that the boards of these companies understand that they have to do what's right for shareholders," said plaintiffs' lawyer Gerald Silk. "If you put yourself up for for sale, you have to go out and get the best price."
Silk, a partner at law firm Bernstein Litowitz Berger & Grossmann, on Monday sued on behalf of the Minneapolis Firefighters' Relief Association challenging the $5.3 billion buyout of Ceridian by Thomas H. Lee Partners and insurance company Fidelity National Financial .
The lawsuit contends that the human resources company's board of directors quickly inked the going-private deal as a way to keep their jobs amid an uproar from angry shareholders seeking to oust them.
The pact contains an unusual provision that gives the buyer a walk-away right if a majority of the board is unseated while the merger is pending, according to the complaint. The deal also gives the buyers the right to collect $180 million if any new board accepts an alternative transaction during the next 12 months, the lawsuit says.
"Effectively, shareholders are saddled with a $180 million penalty for supporting a new slate of directors who will look to approve an alternate transaction," the complaint says.
A Ceridian spokesman said on Thursday that "we believe that the lawsuit is without merit, and we intend to vigorously defend against it."
Corporate lawyers say these lawsuits reflect the growth in investor activism, although they do not think many of the suits will succeed on legal grounds.
"Unless there is some real fraud or collusion or some real teeth to the argument, there's not a tremendous amount of traction these cases are getting," said Richard Rosenfeld, a partner at law firm Pillsbury Winthrop in Washington, D.C., who handles corporate defense matters.
Still, he said, the cases are being closely watched because they can delay mergers and distract companies trying to close the pacts.
Not all angry shareholders go to court. Some are pressuring companies to seek out higher offers in other ways, said William Phillips, chair of the litigation department at law firm Covington & Burling.
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Emmett Stanton, a partner at law firm Fenwick & West LLP, said that private equity firms' very success has helped spur lawsuits challenging their buyout deals.
"The fact that so many private equity firms have been able to profit hugely in the short term after they do a deal makes shareholders wonder, 'if those guys can do it, why can't my current management do it?'," he said. "Shareholders think 'maybe we are undervalued, and this deal isn't so great.'"