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Managing Litigation Risk While Contemplating M&A Activity

by | May 25, 2021

When acquiring an entity, it is critical to understand and address the litigation risk that may come with it.  On this front, it is difficult to overstate the importance of due diligence.  

Before you can analyze, evaluate or treat a risk, it has to be first identified as a risk. Some key considerations for detecting and managing litigation risk when contemplating M&A activity include:

Dig Deep.  Dig smart.  

It pays to engage litigation experts to assist you with due diligence.  Contract disputes, shareholder concerns, regulatory notices, employee complaints, debt commitments—litigation risk is potentially lurking around every corner.  Experienced professionals know how to efficiently search and analyze lawsuit court records, UCC filings, tax liens, bankruptcy proceedings, state regulatory filings and much more.

Remember the Business

When evaluating a specific litigation issue, you obviously need to consider the materiality of that risk as well as the potential for further such suits or claims.  However, sometimes litigation can provide a more general red flag.  The lawsuit or dispute might be signaling a broader issue with the company’s business model that needs to be addressed. 

Litigation Managers

Experienced M&A attorneys are necessary but expensive.  Litigation managers, sometimes called legal risk managers, are not only usually less expensive but can complement your team by bringing focused-expertise to the area of litigation risk.  A good litigation manager combines lawsuit know-how (they are often attorneys themselves) with a significant business background to help you make litigation decisions that are also good business decisions.

Ring-Fence Exposure

Consider insurance to absorb litigation risk.  Litigation Buyout insurance (LBO) can be used to transfer, and cap, your exposure to any uncertain litigation-related risks during and after the transactional process.  You might decide insurance is only needed for a particular lawsuit.  Other times, it might make sense to insure the entire litigation risk related to a merger or acquisition. 

If your company is facing uncertainty because of litigation and you would like to explore strategies to minimize that uncertainty, please contact us to discuss how we may be able to help.

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About the Author

Ross Weiner is the Legal Director at Risk Settlements, where he helps evaluate new business, assess legal and financial risk, and create optimal settlement designs and risk transfer options.

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