Professor Rob Daines spoke with David Gelles from the Financial Times about the trend in lawsuits brought against boards when the companies they serve on are acquired.

When a US company announces it is being sold, there is one thing it can be virtually certain of. It is not that shareholders got a good deal. It is not that the new owner will be a good steward of its business. It is not even that management will be paid handsomely.

Rather, the company being acquired can be sure that its board of directors will be sued.

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“I don’t know of anyone who would seriously contend that 96 per cent of boards are doing a bad job when they sell the company,” says Robert Daines, director of the Rock Centre for Corporate Governance at Stanford University Graduate School of Business, and co-author of the Cornerstone report. On the contrary, Mr Daines points to research that shows most acquirers overpay when doing deals.

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So common has this practice become that companies now fully expect to get sued. Besides factoring in the costs of settling, companies sometimes hold back pieces of information about a deal so they have something easy to disclose. “Critics worry this is just a tax on mergers,” says Mr Daines. “You just have to plan on paying the lawyers.”

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One might like companies to take a stand. If they truly had nothing to hide, why should they settle? The problem is that actually trying such a case is lengthy and costly. Settling is almost always cheaper and easier. “As long as there are gains to settling, there will be gains to bringing the suit in the first place,” says Mr Daines. “The defence bar thinks it’s a little bit like negotiating with terrorists.”

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It is a tough calculation to make, even for the experts. “The real question is: are we getting enough deterrence? I have not found a good way to answer that,” says Mr Daines. “One fears that it becomes kabuki theatre.”

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