New study defines top 5 firms in M&A class actions, says rep deserved

October 20, 2014

Professor Randall Thomas of Vanderbilt Law studies M&A class action litigation. To him, it’s obvious that some plaintiffs’ firms file these now ubiquitous suits simply to collect a so-called “deal tax” and others work the cases hard to win better terms for shareholders. Yet commentary on M&A class actions tends not to distinguish among shareholders’ firms, he said. “It always bothered me that all plaintiffs’ firms are painted with the same brush – they’re either shareholder champions or scum of the earth,” Thomas told me. “The reality is that there are big differences.”

Thomas and two other eminent professors determined to quantify those differences. In a new working paper called “Zealous Advocates or Self-Interested Actors? Assessing the Value of Plaintiffs’ Law Firms in Merger Litigation,” Thomas worked with C.N.V. Krishnan of Case Western’s business school and Steven Davidoff Solomon of UC Berkeley School of Law (and DealBook) to identify the best shareholder firms in M&A litigation. (Hat tip to Kevin LaCroix at D&O Diary.)

They analyzed 1,739 cases between 2003 and 2012, ranking plaintiffs’ firms under four different criteria: raw number of filings; lead counsel appointments; lead counsel appointments in cases involving an institutional investor as lead plaintiff; and fee awards of more than $1 million when the firm served as lead counsel in a case led by an institutional investor. The authors regard the last category as the best indicator of a plaintiffs’ firm’s prominence. They unstintingly refer to the five shops listed in that table as the top law firms in the M&A class action business.

I’ll end the suspense right here. The paper’s chart toppers for cases with fees of more than $1 million are, in order: Robbins Geller Rudman & Dowd; Grant & Eisenhofer; Bernstein Litowitz Berger & Grossmann; Milberg; and Kessler Topaz Meltzer & Check. And according to the study, these firms deserve the big fees they’ve been awarded. They bring better cases and litigate more actively than other plaintiffs’ firms; their dockets have more entries and they’re likelier to ask for expedited proceedings and preliminary injunctions. Their cases are dismissed less often than those brought by other shareholder firms. Most importantly, they also win the best results, according to the study. Shareholders represented by the top 5 firms are more likely to see deal terms sweetened than those represented by other firms.

“Our findings thus support the conclusion that top lead law firms get superior lawsuit outcomes for their clients, and prosecute cases more successfully, as compared to other law firms,” the professors said. “Indeed, the top 5 law firms, based on their popularity with non-individual plaintiffs and based on their large attorneys’ fees’ awards in the recent past, seem to deliver the best outcomes for their clients.”

The professors also found statistically significant evidence that firms on the top 10 charts for filings and lead counsel appointments – including Levi & Korsinsky, Faruqi & Faruqi and Robbins Arroyo – achieved better results than non top 10 firms. But those top 10 lists are skewed toward volume, since a firm that brings a lot of suits is likelier to rack up lots of lead counsel appointments than a shop that is highly selective about its cases. Robbins Geller occupied the top spot in all of the lists, as you would expect if you pay attention to M&A class action challenges. But Grant & Eisenhofer, Bernstein Litowitz and Kessler Topaz weren’t on the volume lists. The professors speculate that these firms win more big fee awards than volume filers because they’re selective: They concentrate on fewer cases and obtain better results. (Thomas did point out to me during an interview that some very successful plaintiffs’ firms, such as Prickett Jones & Elliott and Labaton Sucharow, didn’t bring a high enough volume of M&A cases to show up on any of the study’s lists.)

The professors’ point about selectivity made me wonder about circularity. The plaintiffs firms that get the best results presumably have the widest choice of cases to prosecute. They have the luxury of assessing their prospects and pursuing only the class actions they’re likeliest to win. So it’s no surprise that, according to the new study, cases filed by the top 5 firms tend to be stronger than those of other shops. But do these firms obtain better results because they bring better cases? Or do they get better cases because they achieve better results? It’s a sort of chicken-or-egg issue that the professors acknowledge in their paper. Thomas, in our conversation Monday, said the circularity of outcomes and case quality “is clearly the econometric issue that was the most difficult to deal with.”

To control for it, the professors identified criteria associated with good outcomes for shareholders in M&A class actions (such as whether the deal is a going-private transaction, whether it involves companies in the same industry and whether deal provisions include a go-shop period), as well as factors associated with the appointment of a particular plaintiffs’ firm to lead the case. Those factors, called “instrumental variables,” include whether the firm is headquartered in the same state as the corporation being sued and what percentage of the firm’s lawyers is dedicated to securities litigation. When the professors ran regression analyses taking these instrumental variables into account, they found that even after controlling for the top firms’ ability to pick and choose their cases, “top plaintiffs’ law firms are associated with statistically significant superior outcomes for their clients.”

Thomas said the point of the paper was to draw objective distinctions between plaintiffs’ firms. He and his co-authors argue that their findings – in what is apparently the first study to evaluate plaintiffs’ firms based on a statistical model – are significant enough that judges should take note when they’re picking lead counsel in securities fraud class actions as well as M&A suits. In shareholder fraud cases in federal court, as you know, judges are supposed to evaluate potential lead plaintiffs based on the size of the shareholder’s stake. Almost always, lead counsel are appointed just because they represent plaintiffs with the biggest losses, not necessarily because they can obtain the best outcome for the class. But Thomas and his co-authors suggest that courts might do better to select plaintiffs’ firms for their experience, tenacity and previous results, “based on the evidence … that there is a difference among plaintiffs’ law firms success rates and not just a difference between named plaintiffs.”

I’ve written before on the widening gulf between the plaintiffs’ firms that snag lead counsel assignments in billion-dollar cases and the rest of the plaintiffs’ bar. A handful of firms feast on client relationships with the biggest and most active institutional investors prosecuting the hottest shareholder suits; everyone else scrounges for leftovers. Thomas and his co-authors have confirmed that the difference isn’t just anecdotal. The best plaintiffs’ firms actually litigate harder and win better results. Thomas told me he’s thinking about publishing firm-by-firm data on docket filings, motions practice and results. If he does, public pension funds should bookmark the study and check it every time they hire lawyers.

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