- Companies saw an average 5% drop in share price on announcement of litigation
- Claimants more likely to secure a successful outcome in litigation than defendants
- Breach of contract revealed as the most common reason for conflict
The impact of litigation on company share price has been revealed in a new report from Gowling WLG, with claimants experiencing an average drop of 3.5% on announcement of an active dispute, rising to 6.1% for defendants.
The comprehensive study, 'Taking AIM: How litigation can strike company value', examines the nature and impact of litigation events experienced by AIM and Standard listed companies during the past 14 years.
Carried out by Gowling WLG in partnership with London Business School researcher, Scott Evans, it finds that more than 300 companies disclosed involvement in a total of 397 disputes during the timeframe of this study. Of these disputes, more than a third (38%) involved breach of contract claims, while the energy and mining sectors were revealed as the most likely to be involved in litigation, accounting for almost half (43%) of disputes.
Where the outcome of a dispute was known, 41% of the disputes were concluded within 12 months. This increased to 71% within two years of first disclosure. More than one in 10 (12%) lasted over five years and the longest dispute was over a decade.
Commenting on the findings, Emma Carr, litigation partner at Gowling WLG, said:
"These findings show that litigation had potentially serious consequences for all the companies involved in the study – even those that secured a favourable outcome in the end suffered share price losses on announcement. That's why it's so important to be pre-emptive in your approach. Many conflicts do not end up in litigation and that's often because the parties involved have made full use of the pre-action dispute escalation provisions in their contracts.
"My overarching message for businesses is to invest in a well drafted contract at the outset, keep lines of communication open and to embrace mediation and other forms of alternative dispute resolution – pen and jaw is almost certainly better than all-out war."
Claimants in pole position
The study clearly shows the strength of the claimants' position, with those bringing litigation proceedings more likely to secure a successful outcome in disputes than those on the receiving end of a claim. Almost half (44%) of cases ended positively for the claimant compared to 29% for defendants. Conversely, defendants experienced a negative outcome in 45% of disputes compared to 19% for claimants - the remainder being neutral, ongoing or unknown.
Importantly, the research reveals how the outcome of a case impacts on share price with an average return of +4.5% for all companies involved in the study. For companies announcing a positive outcome, the average relative return was +8.0%, compared to -1.6% for those announcing a negative outcome.
In the 100 days following the conclusion of a dispute, companies experiencing a negative outcome underperformed the market by -12%, while those that announced a positive outcome outperformed the market by +1.5%
Scott Evans, researcher with London Business School, said:
"To the best of our knowledge, this is the first study of its kind to really quantify the impact of litigation.
"It was an ambitious undertaking and is the culmination of almost two years' work. The first challenge was identifying and categorising the data before being able to move to the analysis phase. It involved wading through swathes of publicly available information to pinpoint litigation events over a 14-year period and tracking as many as possible through to their conclusion.
"It proved to be a worthwhile endeavour, providing valuable insights on the nature and impact of litigation."
Download the full Taking AIM report and gain practical advice on how to manage potential disputes and maintain effective commercial relationships.