Minority shareholders biggest litigation threat

Almost half of all private equity firms in a new survey expect litigation to increase in the next two years. But the major threat is unlikely to come from regulators, as most firms seem to think.

Minority shareholders pose the biggest litigation threat to the private equity industry in the coming years, according to a new survey – even though most firms seem more worried about regulatory scrutiny.

The report, by risk advisory group Marsh, revealed that almost half of the 150 firms surveyed globally expect litigation to increase in the next two years. However, although regulatory intervention was perceived as the biggest threat, lawsuits from minority shareholders were far more common, according to Marsh.

The survey revealed that 47 percent of respondents expected litigation to increase, while 43 percent thought it would stay the same and just six percent expected it to decrease. But although 83 percent expected regulators to be the biggest source of litigation, the reality is that regulators currently account for just two percent of legal action against private equity firms.

A far greater threat is posed by minority shareholders, according to the report, who represent 46 percent of all claimants in the US and 21 percent in Europe report. The most frequent allegation in both the US and Europe relates to a breach of fiduciary responsibility, often against a board of directors that agrees to sell to private equity at a price shareholders believe under-values the business.

Portfolio directors and officers are the next biggest source of litigation, representing 18 percent of claimants, followed by liquidators, who represent 15 percent of claimants.

Marsh’s survey highlighted further divergence concerning the drivers of future private equity litigation.

More than half of the firms surveyed, or 51 percent, considered media attention to be a probable future driver of increased legal action against the industry. Private equity has been constantly in the headlines in recent months, particularly in the UK, as left-wing politicians and trade unions have openly criticised the industry. Indeed, government and trade union intervention is another factor firms considered an important catalyst for litigation, cited by 42 percent of respondents.

However, private equity lawyers and insurers believe that excessive leverage, public-to-private deals and expansion into emerging markets will be the biggest drivers behind future litigation.