Must read: Deal Prof’s study of competition for M&A litigation
I usually bail out of academic studies on litigation pretty quickly; if the data is stale or the papers don’t seem to account for real-world tactics by plaintiffs’ and defense lawyers, I don’t bother to keep reading. That’s why a just-released analysis by Matthew Cain, a finance professor at Notre Dame, and Steven Davidoff of Ohio State’s Moritz College of Law, is such a rarity. The paper, titled A Great Game: The Dynamics of State Competition and Litigation, features up-to-the-minute commentary and a deep understanding of why lawyers do what they do.
It’s probably not a coincidence that Davidoff moonlights as Dealbook’s Deal Professor, where he tracks day-to-day developments in shareholder litigation. A Great Game opens with a look at the $300 million fee award Chancellor Leo Strine Jr. of Delaware Chancery Court bestowed on plaintiffs’ lawyers in the Southern Copper case in December, and prominently mentions Strine’s already-legendary comments at the November 2011 Columbia Law School conference on Chancery Court.
More importantly, Davidoff and Cain looked at the litigation spawned by 955 public deals, completed between 2004 and 2010 and valued at more than $100 million. From that hand-curated sample, they examined Securities and Exchange Commission filings, court filings, and other public documents to find out where cases were filed, whether they were dismissed or settled, what kind of benefits shareholders achieved in settlements, and what plaintiffs’ lawyers were awarded in fees. They assembled the data into a series of charts and tables that show some significant trends in M&A shareholder litigation.
Their bottom line: “Entrepreneurial plaintiffs’ attorneys constantly recalibrate the optimal jurisdiction in which to bring litigation.” M&A shareholder litigation has become a given in major deals, according to the paper. (Only 38.7 percent of transactions from 2005 were challenged in shareholder suits; 84.2 percent of 2010 deals generated litigation.) Plaintiffs’ lawyers can typically choose to file in the target’s state of incorporation or its headquarters state. The paper documents the increasing likelihood that shareholder suits will be filed in multiple jurisdictions — not very surprising to anyone who follows M&A litigation — but it also shows that plaintiffs’ lawyers seem to respond to the results they get in various jurisdictions. State courts that have lower dismissal rates and higher fee awards appear to attract cases. “States thus have a choice,” Davidoff and Cain write. “They must either compete to attract litigation, or cases will migrate to jurisdictions which are more willing to compete to attract litigation.”
The paper posits two levers that state courts can manipulate to attract plaintiffs’ lawyers: dismissal rates and fee awards. Strine and other Delaware judges have implied that the cases they want are those that result in significant benefits to shareholders, rather than those that end in “disclosure-only” settlements that merely beef up proxy statements. Strine promised plaintiffs’ lawyers at the November conference that if they bring good cases, such as Southern Copper or Del Monte, they’ll be handsomely rewarded. Cain and Davidoff demonstrate, however, that Delaware Chancery Court has become less likely to dismiss cases as venue competition has increased. So, despite the court’s protestations, “Delaware thus appears to be catering to entrepreneurial plaintiffs’ attorneys who prefer to diversify and obtain smaller awards in many cases rather than large awards in a smaller number of lawsuits.”
The paper found that Delaware Chancery Court did not appear, in the aggregate, to be using big fee awards to woo plaintiffs’ lawyers. The state, which was the jurisdiction for 28 percent of the settlements the professors examined, does award higher median fees — $695,000 — than its two biggest venue competitors, California ($500,000) and New York ($510,000). Illinois awards the highest median fees, $860,000; the nationwide median fee award, according to Davidoff and Cain, is just under $600,000. But Delaware’s relatively generous fees do not appear to be an adjustment “in response to attorney forum shopping,” according to the study. Interestingly, Davidoff and Cain found that the overall percentage of disclosure-only settlements has decreased as attorneys’ fees have risen.
In contrast to Delaware, which appears to be pulling the lever of dismissals, California state courts seem to have adjusted fees to attract plaintiffs, according to Davidoff and Cain. (The paper says Tennessee, Nevada, and Georgia are also fee-friendly states.) Nevada is unabashedly courting M&A litigation with both low dismissal rates and sizable fee awards. Pennsylvania appears to be unfriendly to plaintiffs’ lawyers on both counts.
Cain and Davidoff do caution that it’s difficult to definitively discern the motivations of the plaintiffs’ lawyers who file M&A shareholder suits, or of the state courts that appear to react to filings. In the meantime, they’ve given us a lot of data to chew on and some provocative conclusions to debate.
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