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Spending $1bn to settle a lawsuit sounds like no fun at all. But what if that $1bn is instead regarded as an investment that can unleash tens of billions of dollars in gains? Then it becomes a canny trade.
That’s how companies increasingly see the risk of having to pay off disgruntled investors. A new report from Cornerstone Research shows that merger-related judgments and settlements in Delaware, where most big American companies are incorporated, have exploded in number and value. Between 2022 and 2024, there were on average nearly 20 resolutions annually, four times the rate a decade earlier. Some surpass $100mn.
Disputes often arise because a large, powerful shareholder is seen to have ridden roughshod over smaller ones — for example, in a buyout in which the insider sits on both sides of the table. In part, that reflects the fact that such situations are more common with founder-led companies backed by private equity and venture capital going public.
But lawyers are also telling boards it is cheaper to purchase forgiveness instead of permission. Fielding a lawsuit from shareholders who feel a take-private deal undervalued them may be costly, but still cheaper than raising the purchase price. Most of the merger settlements and judgments across Cornerstone’s 13-year sample added up to less than 5 per cent of the combined deals’ value.
In any case, plenty of lawsuits just get dismissed. And courts will not typically unwind a deal once it has been done. So the probability-weighted possibility of paying a prohibitive penalty in relation to the deal price must seem manageable.
Computer maker Dell is a real-world example. Its buyout of affiliate VMware in 2018 aroused the ire of Elliott Management and other shareholders, who claimed the price was unfair. The $1bn Dell paid to settle the resulting lawsuit now looks tiny next to its $110bn market capitalisation; its share price has increased sixfold since the buyout.
In another example, entertainment group Endeavor — the majority owner of WWE wrestling — agreed a $13bn go-private transaction with its founder Ari Emanuel without letting ordinary shareholders vote. Lawsuits are now flying.
Granted, companies would still rather avoid the courts if they can. The rise in litigiousness has raised the cost of insurance for directors and board members. Some companies are also moving to less shareholder-friendly jurisdictions. Tesla has moved to Texas; video game developer Roblox redomiciled in Nevada. Delaware has since legislated to reduce the ease with which shareholders can file suits.
That is a poor omen. Shareholder litigation may sometimes be frivolous, but it also helps keep companies honest. It’s hardly ideal if powerful insiders see legal settlements as the acceptable cost of giving minority shareholders a rough deal. But it’s better than there being no cost at all.
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