The New Look of Shareholder Litigation: Acquisition-Oriented Class Actions

Shareholder litigation is the most frequently maligned legal check on managerial misconduct within corporations. Derivative lawsuits and federal securities class actions are portrayed as slackers in debates over how best to control the managerial agency costs created by the separation of ownership and control in the modern corporation. In each instance, early hopes these suits would effectively monitor managerial misconduct have been replaced with concerns about the size of the litigation agency costs of such representative litigation, which can arise when a self-selected plaintiff\u27s attorney and her client that are appointed to pursue the claims of an entire class of shareholders have interests that may differ from those of the class. Now, however, a new form of shareholder litigation has emerged that is distinct from derivative or securities fraud claims: class action lawsuits filed under state law challenging director conduct in mergers and acquisitions. The empirical data reported in this article show that these acquisition-oriented suits are now the dominant form of corporate litigation, outnumbering derivative suits by a wide margin. Are these acquisition-oriented class actions just another deadbeat in the corporate governance debate? Should policymakers take action to cut back on the development of this new form of shareholder litigation? In this paper, we argue that, just as with derivative suits and securities fraud class actions, good policy must balance the positive management agency cost reducing effects of these acquisition-oriented shareholder suits against their litigation agency costs. This new breed of suits has positive management agency cost reducing effects that may offset the litigation agency costs that accompany them. Our data set of all 1000 corporate fiduciary duty cases filed in Delaware in 1999 and 2000 is the largest empirical study of shareholder litigation. We find that more than 80% of these cases are class actions against public companies challenging one type of director decision - whether or not to participate in a corporate acquisition. By contrast, derivative suits, the traditional shareholder litigation that is the staple of corporate law casebooks, make up only about 14% of all fiduciary duty suits. The acquisition-oriented class actions are a new, previously unstudied category of representative litigation, an area long dominated by studies of state derivative suits and federal securities fraud class actions. We find these suits do provide some management agency costs reductions, but these are concentrated in only one subset of the suits that are brought. Settlements leading to relief in an acquisition setting are not spread across all acquisitions complaints (including hostile, second bidder acquisitions, etc.), but rather concentrated where there is a majority shareholder who is attempting to cash-out the minority interest held by public shareholders on terms that have been picked by the majority. On the opposite side of the equation - whether these suits possess high litigation agency costs - we find conflicting evidence. The acquisition-oriented class action suits have many characteristics that have been identified in other contexts as indicators of agency costs (e.g., suits filed quickly, many suits per transaction). Yet, these litigation agency costs are below the level of perceived costs that spurred securities fraud legislation. Placing our findings in the historical context of the debate over the value of representative shareholder litigation, we believe that the positive management agency cost reducing effects of acquisition-oriented class actions are substantial, while the litigation agency costs they create do not appear excessive. For these suits, we therefore disagree with earlier studies that have claimed that all representative shareholder litigation has little, if any, effect in reducing management agency costs and should be evaluated solely in terms of its litigation agency costs

A Theory of Representative Shareholder Suits and its Application to Multijurisdictional Litigation

We develop a theory to explain the uses and abuses of representative shareholder litigation based on its two most important underlying characteristics: the multiple sources of the legal rights being redressed (creating dynamic opportunities for arbitrage) and the ability of multiple shareholders to seek to represent the collective group in such litigation (creating increased risk of litigation agency costs by those representatives and their attorneys). Placed against the backdrop of controlling managerial agency costs, our theory predicts that: (1) the relative strength of the different forms of shareholder litigation will shift over time; (2) these shifts can result in new avenues for the expression of shareholder litigation power; (3) new agents will emerge to act on shareholders’ behalf when these shifts occur (or old agents will put on new hats); and (4) a new set of principal-agent costs resulting from litigation will arise out of these new relationships, leading to recurrent questions about how these costs should best be controlled in particular contexts. Applying our theory to recent academic and practitioner claims of abusive multi-jurisdictional forum shopping in representative corporate litigation, we conclude that these claims are both overstated and misdirected. Instead, we find a significant amount of what we call fee distribution litigation. In these cases, multi-jurisdictional suits are filed by plaintiffs’ law firms largely to obtain a slice of the total pool of plaintiffs’ attorneys’ fees that are paid in a global settlement in one of these cases. We show that fee distribution litigation is quite different than traditional forum shopping and requires a different policy response. We then consider various approaches and conclude that, while no one of them is perfect, judicial comity is the best and least costly option

The New Look of Shareholder Litigation: Acquisition-Oriented Class Actions

Now, however, a new form of shareholder litigation has emerged that is distinct from derivative or securities fraud claims: class action lawsuits filed under state law challenging director conduct in mergers and acquisitions. The empirical data reported in this article show that these acquisition-oriented suits are now the dominant form of corporate litigation and outnumber derivative suits by a wide margin. Are these acquisition-oriented class actions just another deadbeat in the corporate governance debate? Should policymakers take action to cut back on the development of this new form of shareholder litigation? In this paper, we argue that, just as with derivative suits and securities fraud class actions, good policy must balance the positive managerial agency cost reducing effects of these acquisition-oriented shareholder suits against their litigation agency costs. To frame our analysis of acquisition-oriented class actions, we begin with a look back at the history of this debate over representative litigation in corporate and securities law. For six decades, there have been efforts to limit shareholder derivative suits. These suits, in which one shareholder sues in the name of and on behalf of the corporation, are. usually brought to enforce various fiduciary duties that officers and directors owe corporations and their shareholders. They thus can be contrasted to normal corporate litigation in which directors determine what actions to take for the corporation. Derivative suits were once said to have promise as a means to limit managerial agency costs

The Public and Private Faces of Derivative Lawsuits

Derivative suits, long the principal vehicle for discussions about representative litigation in corporate and securities law, now share the stage with younger cousins - securities fraud class actions and state law fiduciary duty class actions. At the same time alternative governance vehicles - independent directors, auditors and other reforms that have followed in the wake of Enron - potentially diminish the relative place of litigation such as derivative suits. This article presents data from all derivative suits filed in Delaware over a two-year period. We find a relatively small number, certainly as compared to fiduciary class action and securities fraud class actions. Unlike these other representative suits, derivative suits are used for both public and close corporations. They arise usually in a duty of loyalty context. Contrary to earlier studies, we do not find evidence that these cases are strike suits yielding little benefit. Instead, roughly 30% of the derivative suits provide relief to the corporation or the shareholders, while the others are usually dismissed quickly with little apparent litigation activity. In cases producing a recovery to shareholders, those amounts typically exceed the amount of attorneys\u27 fees awarded by a significant margin. They do demonstrate some indicia of litigation agency costs (for example suits being filed quickly, multiple suits per controversy, and repeat plaintiffs\u27 law firms), but each of these is much less pronounced for derivative suits than for other forms of representative litigations. Overall, the claim that derivative suits are strike suits is much weaker than in earlier periods. The Delaware judiciary, which hears most public company corporate litigation in America, has effectively monitored these cases. There is room to open the door for larger shareholders to utilize these suits to police corporate misconduct. Institutional shareholders, while not willing to take on as large a role in governance as many have suggested in terms of naming directors and the like, may be willing to take a larger role in derivative litigation. Thus we see potential for derivative litigation to play a more important role in the future. We therefore suggest that suits brought by a one percent or larger shareholder should be excused from the demand requirement currently applied in derivative suits

Shareholder Voting in an Age of Intermediary Capitalism

Shareholder voting is a key part of contemporary American corporate governance. As numerous contemporary battles between corporate management and shareholders illustrate, voting has never been more important. Yet, traditional theory about shareholder voting, rooted in concepts of residual ownership and a principal/agent relationship, does not reflect recent fundamental changes as to who shareholders are and their incentives to vote (or not vote). In the first section of the article, we address this deficiency directly by developing a new theory of corporate voting that offers three strong and complementary reasons for shareholder voting. In the middle section, we apply our theory to a world where most shares are held by institutional investment intermediaries (and mostly within retirement plans). We show that intermediaries’ business plans give them little reason to vote those shares and even create conflicts of interest that may distort their votes. Yet several key developments have countered that reality and opened the way for voting’s new prominence. First, government regulations now require many institutions to vote their stock in the best interests of their beneficiaries. Second, subsequent market innovations led to the birth of third party voting advisors, including Institutional Shareholder Services (ISS), which help address the costs of voting and the collective action problems inherent in coordinated institutional shareholder action. Third, building on these developments, hedge funds have aggressively intervened in corporate governance at firms seen as undervalued, regularly using the ballot box to pressure targeted firms to create shareholder value, thereby giving institutional shareholders a good reason to care about voting. But there is more to the corporate franchise than hedge fund inspired voting. Say on Pay proposals, Rule 14a-8 corporate governance proposals, and majority vote requirements for the election of directors, are all important, recurrent topics involving shareholder votes. We must also explain why these lower value votes should be held. In our concluding section, we apply our theory to examine when shareholder voting is justified. We examine hedge fund activism as an example of high value voting situation and Say on Pay votes as an illustration of lower value cases where there are still good reasons to have shareholder votes

B640: An Evaluation of the Distribution of Trucked Pulpwood in East-Central Maine

The movement of pulpwood from forest to market can be a critical and costly activity. Many factors influence this movement and contribute to its complexity. In 1963, a study was undertaken to quantitatively describe the distribution patterns of trucked pulpwood for a representative area of the state of Maine.https://digitalcommons.library.umaine.edu/aes_bulletin/1074/thumbnail.jp

A Puzzle Involving Galactic Bulge Microlensing Events

We study a sample of 16 microlensed Galactic bulge main sequence turnoff region stars for which high dispersion spectra have been obtained with detailed abundance analyses. We demonstrate that there is a very strong and highly statistically significant correlation between the maximum magnification of the microlensed bulge star and the value of the [Fe/H] deduced from the high resolution spectrum of each object. Physics demands that this correlation, assuming it to be real, be the result of some sample bias. We suggest several possible explanations, but are forced to reject them all,and are left puzzled. To obtain a reliable metallicity distribution in the Galactic bulge based on microlensed dwarf stars it will be necessary to resolve this issue through the course of additional observations.Comment: Submitted to ApJL, table 2 (quite long) will only appear in the on-line version of ApJ