The rising price of dealmaking

Still, successful investor lawsuits show that "a deal fails for reasons that, in retrospect, people argue should have been clear from the beginning," says Mickey Raup, a Washington, D.C.-based attorney at Polsinelli. "Occasionally, you hear of a deal that's so obviously anti-competitive it never should have gotten out of the boardroom. I don't expect to hear those arguments about Walgreens." The company declines to comment.

The question of whether the government would permit the Walgreens-Rite Aid deal was hotly contested from the day it was announced in October 2015, making it harder for a plaintiff to argue that Walgreens behaved recklessly or deceptively in pursuing it.

Shareholders also sue over the breakup fee that spurned buyers customarily pay their targets when an acquisition fails. Deerfield-based Walgreens will shell out $325 million to Rite Aid, which is based in Camp Hill, Pa. Salvaging what it could, Walgreens said on June 29 that it also is buying 2,186 Rite Aid stores—roughly half its locations—for $5.18 billion in cash.

Regardless of whether shareholders have a good argument, lawsuits seem inevitable, based on litigation trends. Last year, filings in federal securities class-action lawsuits rose to the highest level in two decades, according to consulting firm Cornerstone Research. Shareholders made 270 filings in 2016—a 43 percent year-over-year increase—largely related to mergers and acquisitions. What's more, the number of filings against biotechnology, pharmaceutical and health care firms increased 86 percent last year, to 80, according to Cornerstone.

Dealmakers get sued at both ends. Investors in target companies typically sue at the beginning, alleging the proposed takeover is bad for them. Then, if the tie-up unravels, the acquiring companies get hit for not delivering the goods.

That's what's happening to the parties in two recently thwarted health insurance megamergers. Before their $54 billion deal fell apart in February, Cigna in 2015 settled six class-action lawsuits alleging that it had shortchanged investors by agreeing to be acquired by Anthem. Meanwhile, Humana also agreed to settle similar lawsuits related to its proposed $37 billion merger with Aetna before the deal was rejected by federal regulators in January. Now Aetna faces a class-action suit by shareholders upset by the company's falling stock price.

North Chicago-based AbbVie has been dogged by lawsuits since it called off its $55 billion union with Irish drugmaker Shire back in 2014. Most recently, ODS Capital, a Shire shareholder in Jupiter, Fla., sued AbbVie in June in Cook County Circuit Court for walking away from the deal after the Obama administration quashed some of the benefits of so-called tax inversions that allow U.S. companies to legally change their headquarters to a lower-tax nation.

As part of the deal, AbbVie wanted to reincorporate in Jersey, one of the Channel Islands off the French coast of Normandy, where Shire is registered (though it operates from Dublin).

The complaint alleges that AbbVie CEO Richard Gonzalez repeatedly denied that tax benefits were the main motivation behind the merger but then dropped the deal immediately after the federal government moved to crack down on corporate inversions.

An Illinois judge dismissed a separate proposed class action by Shire shareholders last year, saying that the plaintiffs did not show that AbbVie had misled Shire investors. But in March, the same judge let another suit continue, finding that a letter from Gonzalez to shareholders could be construed as reckless. In May, AbbVie's own shareholders sued the company in Delaware, where it's incorporated.

"Generally speaking, these shareholder suits tend not to be a material event," says Damien Conover, an analyst at Morningstar who follows AbbVie. The litigation "is not something we're factoring in."

Walgreens undoubtedly is hoping for a similar assessment.

"The​ rising​ price​ of​ dealmaking"​ originally​ appeared​ in​ Crain's​ Chicago​ Business.