HSG Evaluates Appropriateness of Directors’ and Officers’ M&A Due Diligence

HSG was hired to opine on the due diligence and disclosure practices of the officers and directors of a defendant company in a corporate acquisition. Plaintiffs alleged that defendant’s registration statement was materially false and misleading because it failed to disclose that (1) the defendant lacked the talent and resources to successfully integrate Company B and achieve the predicted merger savings, and (2) the defendant used discounting practices to offset sales declines, resulting in lower margins.

Claim One

The HSG team reviewed defendant’s public filings and internal communications, and found that the company had successfully acquired and integrated companies over many years prior to the acquisition at issue. The defendant company through its previous acquisitions, understood how to hire the right professionals to conduct due diligence and the company’s officers and directors understood how to manage the work of the professionals and assess the results of the diligence reports as well as how to integrate an acquired company into their company using a combination of internal and external resources. They also did so in this acquisition and quickly achieved the cost savings predicted.

Claim Two

In regards to the claim about the lack of disclosure of discounting practices, HSG concluded that the officers and directors properly exercised their business judgement that the registration statement was complete without an additional disclosure regarding the company’s discounting practices primarily because the amounts of income associated with the discounting efforts were quite small – 2% of net sales could be tied to discounting efforts. Additionally, HSG observed that the defendant company tracked sales discounts across all businesses before aggregating this information into a report shared with the company’s financial teams, its auditor and the committee that reviewed disclosures that would be included in public filings. Furthermore, the company’s auditor assured the company that there was not a need for further disclosure since the amount involved was not material.

Result

Ultimately the defendant company settled the case while continuing to deny all charges.

Claim One

Claim Two

Result

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