A litigious follow-up

When I arrived at work on Friday morning, a headline relating to the big news that has the industry buzzing--the pending merger of Signet and Zale--caught my eye immediately. “Signet to Buy Zale, Law Firms Cry Foul” it read, with the corresponding article going on to list five, just to “name a few,” law firms that are “investigating” the deal.

Michelle Graff michelle.graff@nationaljeweler.com

I followed the trail to find a dozen (though I am sure there are more) law firms that had issued news releases immediately following announcement of the proposed acquisition announcing their intention to look into the deal to ensure that the board of directors of Zale Corp. are doing what is in the best interests of shareholders. In one such release, a law firm analyst stated that, “Signet’s offer appears to be inadequate and not in the best interest of Zale’s shareholders. Zale shareholders weathered a long turnaround and now, when the company is back on track, the company is being sold from underneath them.”

Though I did not find a quote quite like this anywhere else, all of the releases were basically the same, and all issued a call to action, so to speak, asking shareholders who want additional information concerning their legal rights to contact the law firm.

Zale, for its part, said it had no comment on any of these law firms’ statements. But a few people I spoke with in the industry confirmed what I had suspected: that these types of investigations are not at all uncommon today.

There was an interesting post on this topic published in March 2013 on a Harvard Law School blog. The article, which came from Cornerstone Research and was an analysis of a report by Cornerstone’s principal researcher and a Stanford Law School professor on M&A litigation in 2012 deals, states that “continuing a recent trend, shareholders challenged the vast majority of M&A (merger and acquisition) deals in 2012.”

The more money there is at stake, the more challenges there are. A total of 93 percent of deals valued at more than $100 million were challenged, with an average of 4.8 lawsuits per deal, according to the research. This number climbed to 96 percent and an average of 5.4 lawsuits for deals valued at more than $500 million. The proposed Signet-Zale merger is worth more than double this amount at $1.4 billion.

In most of these lawsuits, which generally take the form of class actions (hence the firms’ calls for anyone with questions about their “legal rights” to contact them), the arguments include failure to conduct a sale that was competitive enough or conflicts of interest, which can include executive retention or change-of-control payments to executives, according to the research.

On the first point, it is

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difficult to say exactly just how competitive a sale such as this could be. In other words: What other companies would have wanted Zale? Fine jewelry is a very specialized business and, as consultant Ben Janowski stated in my analysis piece published Thursday, “Who was going to buy them (Zale)? The only reasonable, logical buyer was Signet all along.” Signet, longtime industry analyst Ken Gassman points out, is the only player with the both the “fit” and the money; Tiffany & Co. might have the money, but Zale’s middle-market stores are not a fit for its brand.

One possible angle the attorneys could try to take is that Terry Burman, the former Signet CEO who was appointed to head Zale’s board in May 2013, had a deal in place before he even agreed to become Zale’s chairman, Gassman said. Lawyers will want to know if Golden Gate Capital, the company that issued Zale a $150 million lifeline in 2010 and owns a 22 percent stake in the company, is paying Burman a “finder’s fee” for obtaining a premium-to-market price, he said.

But, the general consensus seems to be that none of these investigations will amount to much; or, as Gassman put it, “I’d tell the lawyers to go home and try to find dirt on some other deal.”

Perhaps a few will result in lawsuits, but it seems likely those will get settled rather quickly. The authors of the Cornerstone article said that of the lawsuits relating to 2012 M&A deals for which they were able to determine the outcome, 64 percent settled an average of 42 days after they were filed. The plaintiffs voluntarily dismissed 33 percent of the suits and the remaining 3 percent were dismissed by the courts.

Anyone familiar with litigation knows that 42 days is an incredibly short time to settle a lawsuit, considering many suits--think the De Beers class-action--drag on for years. But it doesn’t seem likely that this will be the case here, and the merger should go through and close as expected by the end of 2014.

Michelle Graffis the editor-in-chief at National Jeweler, directing the publication’s coverage both online and in print.