Target Shareholders Cannot Compel Disclosure of Merger File by Target’s Law Firm

Share

Explore a recent legal case that delves into the rights of shareholders in M&A deals to compel disclosure of merger-related information from the target company’s law firm. Discover how the court’s ruling highlights the law firm’s allegiance to the target company and the ownership of merger files by the buyer.

M&A Stories

January 8, 2021

In the world of mergers and acquisitions (M&A), a recent legal case sheds light on an important matter: whether shareholders of the acquired company can force the law firm that represented the target company to reveal information from the merger process. This case clarifies that the law firm’s allegiance is to the target company itself, not its shareholders, and that the files related to the merger are now under the ownership of the buyer.

Background:

In M&A deals, after the acquisition of a company, shareholders often have the right to receive additional payments based on certain conditions. These payments, known as post-closing contingent payments, can lead to disagreements between the buyer and the selling shareholders about how they are calculated.

The Case:

The focal point of this case was a privately held insurance group that specialized in providing workers’ compensation insurance and related services across 31 states. The buyer acquired this company through a merger for a sum of $138 million in cash, alongside contingent value rights.

Conflict arose between the selling shareholders and the buyer regarding the value of these contingent rights. As a result, the selling shareholders filed a lawsuit against the buyer, seeking $80 million. Their allegation was that the buyer manipulated financial reserves, misrepresented liabilities, and distorted information about the contingent value rights, thus depriving them of their entitled purchase price.

During the legal proceedings, the selling shareholders requested that the law firm representing the target company share specific files concerning the contingent value rights. However, the law firm declined, asserting that its duty was to represent the target company and not its shareholders. Furthermore, the files related to the merger were now the property of the buyer.

The Verdict:

The Nebraska Supreme Court ruled in favor of the law firm’s stance. The court affirmed that the law firm’s responsibility was limited to representing the target company, as per their engagement agreement. The agreement explicitly stated that it did not establish an attorney-client relationship with the shareholders.

This case is referred to as Yeransian v. Farr, No. S-19-320, Supreme Court of Nebraska, (Filed May 1, 2020). 

Conclusion:

This case underscores an essential aspect of M&A transactions. Shareholders of an acquired company face risks, particularly when dealing with post-closing contingent payments. The lack of access to the law firm’s insights on contingent rights introduces an additional layer of risk for shareholders involved in such deals.

By John McCauley: I help people manage M&A risks involving privately held companies.

Email:             jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles

Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

Posted in Ownership of Target Law Firm File Tagged with: , , , , , , , , , ,

Recent Comments

Categories