Due diligence for litigation paralegals
Due diligence traditionally is thought of as an area handled by corporate lawyers and paralegals as part of negotiating mergers, acquisitions and other contractual agreements. However, due diligence in litigation is one aspect of the merger process where a litigation paralegal can shine.
Litigation due diligence involves evaluating past litigations and pending lawsuits and claims, as well as reviewing any possible future exposure to lawsuits. This helps potential buyers or potential partners in a joint venture decide whether it makes sense to buy the company, and it also can be used to help determine the price and other details of the negotiation and purchase. Litigation paralegals can be invaluable to this aspect of the merger process because of their experience working with dockets and pleadings, their knowledge of how to read and analyze litigation documents and files, and their research skills.
Types of Litigation Activity
Researching past and current litigations is an increasingly vital part of the merger negotiating process. As the paralegal performing this research, you need to be aware of the types of litigation in which a company could be involved, especially given the current climate of increasing litigation activity in the following areas:
Damages. Is the company pursuing or defending against the collection of damages for defective products? These products can be anything from motor vehicles to pharmaceutical products. The damages can range from one-time awards granted to a single plaintiff to class action lawsuits in federal and state courts involving thousands of plaintiffs and the possibility of long-term monitoring for health concerns (e.g., in cases that involve pharmaceutical or other health-related products). Other damages claims might involve being overcharged for services, such as mortgages or credit cards; missed investment opportunities because of false reporting regarding a company’s financial situation; or allegations of preferential allocation of highly desirable shares during initial public offerings.
Pension Plans. Is the company being sued by past or current employees over pension plan issues? If yes, this could mean the buyer of the company will inherit the liability and will have to pay if the plaintiffs get a judgment. This could require recovering the loss of value of funds in pension plans under the Employee Retirement Income Security Act due to false or misleading earning reports or failing to allow a company’s retirement plans to invest outside its own stock, such as was the case with Enron Corp.
Corporate Assets. Is the company involved in any litigation to protect corporate assets, such as patents, copyrights, trademarks and other trade secrets (e.g., customer lists and supplier databases), including the enforcement of noncompetition agreements with former employees now working for competitors? The potential buyer will want to know the chances of success. Does success mean the other party will stop infringing, or can the company collect damages? Or, is the company being accused of infringing on someone else’s intellectual property and facing the possibility of paying damages to someone else?
Identifying Potential Exposure
Depending on the business or industry in question, litigation due diligence also includes identifying any current or past exposure to lawsuits the company faces for environmental and related damages. This includes any liabilities that might have been assumed by the company in prior mergers or acquisitions. For example, depending on the company, your research might include an analysis of potential liability for environmental damages and cleanup expenses resulting from superfund sites, or the cleanup or damages associated with exposure to toxic substances such as asbestos, lead in paint, or other chemicals.
Along with determining the existence and extent of any potential exposure or liabilities, you also will need to determine what insurance coverage the company has available, whether coverage was or is under litigation (e.g., the insurance company refuses to pay), and whether the defense is covered by insurance under a reservation of rights. In addition to researching and analyzing the insurance policies, you might also need to review and determine the litigation pattern of the relevant insurance carriers, such as whether they have a history of denying claims or disputing coverage under the same or similar types of exposure the company is facing. You also need to determine how much coverage is available, both on a per-claim basis and under the policy overall, and whether coverage includes litigation expenses or only potential damage awards.
Another potential liability you will need to review is the bankruptcy filings of the target company and its subsidiaries. Also, review any monies owed by third parties currently undergoing financial restructuring or operating under bankruptcy protection. Does someone owe money to the company your client wants to buy, and what are the chances of collecting that money? A company could have a large number of outstanding receivables by pre-existing clients who can’t pay because they are in bankruptcy. The receivables add no value to the merger because the money can’t be collected. The potential recovery versus the cost of said recovery, such as legal fees, will play into the overall financial feasibility or attractiveness of the transaction for your client.
Keeping Costs Down
Litigation due diligence is a necessary expense to avoid excessive damages or to protect signed contracts, assets and intellectual property rights. It will not make a deal go smoother, but can alter or cause the termination of plans for an acquisition or joint venture. The buyer might decide the potential exposure and liabilities make the deal impractical or will require renegotiations of the acquisition price and potential future liabilities to be covered by the seller or one of the parties in the joint venture. Another possibility is that a client might be one of several bidders for a particular company or asset, and regardless of the due diligence efforts, the deal might not go through because the sale of the company could go to another bidder.
Given these possibilities, the legal team usually is asked to minimize the overall costs of due diligence and litigation due diligence. As the paralegal performing much of the litigation research, there are a number of ways you can keep costs down:
Perform research on databases such as Westlaw, LexisNexis, PACER and CourtLink under the rule “as little as possible, but as much as necessary.” In other words, conduct whatever research is needed to cover all the bases and to protect the client’s interests without expending unnecessary time and money.
Restrict court searches to (1) certain geographic areas, such as the state(s) where the company mainly operates or has its headquarters or main offices; (2) certain types of litigation (e.g., when a car manufacturer is sued for product liability because of traffic accidents when someone claims the car malfunctioned, or when a pharmaceutical company is sued for product liability because people taking a medication experience negative side effects); and (3) certain timeframes relevant to the contract in question.
Carefully review the initial search results from litigation and docket searches prior to ordering potentially expensive copies of pleadings and court filings. Determine which documents easily can be retrieved online and which documents might have to be retrieved by sending an outside retrieval service or a paralegal to court to physically inspect the files and copy the documents.
Know your firm’s vendors and vendor contracts, as well as the individual vendor’s cost structure for certain tasks, in order to choose the most prudent approach for obtaining particular documents, balancing both time constraints and budget limitations.
A Win-Win Situation
As a litigation paralegal, the more you are able to handle in regard to litigation due diligence, the smoother the overall due diligence project, creating a winning situation for everyone involved in the mergers and acquisitions process.