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
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
(Reporting by Alison Frankel)
Follow Alison on Twitter: @AlisonFrankel
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