Please update your browser

You're using a version of Internet Explorer that isn't supported by Questia.
To get a better experience, go to one of these sites and get the latest
version of your preferred browser:

Leveraging Litigation: How Shareholders Can Use Litigation Leverage to Double-Down on Their Investment in High-Stakes Securities Litigation

By Gojkovich, Lauren Deysher | Stanford Journal of Law, Business & Finance, Fall 2010 | Go to article overview

Leveraging Litigation: How Shareholders Can Use Litigation Leverage to Double-Down on Their Investment in High-Stakes Securities Litigation


Gojkovich, Lauren Deysher, Stanford Journal of Law, Business & Finance


Introduction

Your client is an activist shareholder who wants to hold the board of directors accountable for actions that pose a likely breach of fiduciary duty. Faced with the prospect of months, if not years, of litigation, your client is hesitant to assume the massive legal costs of a lawsuit with an uncertain outcome. If only it were possible to shift your client's cost-benefit analysis so that even given the uncertainty of litigation, the potential benefit is so great it is still a wise decision to litigate the claim. Well, today it is possible to increase the risk-adjusted rate of return on securities litigation by engaging in what this author terms "litigation leverage."

In the context of securities litigation, a litigant's return on their investment in a lawsuit has historically been subject to an unavoidable fixed cost - namely, the market price of the securities on which their claim is based. However, following the groundbreaking decision of the Delaware Court of Chancery in Emerging Communications,'1 it is now possible to move this cost floor below the market price of the physical shares by purchasing only one stick in the bundle of rights associated with stock - the litigation rights.

The purchase of litigation rights is in effect similar to the purchase of a call option: the investor takes a position based on a positive view of the target, expending fewer resources to achieve the same exposure as if they owned the physical shares, while limiting their downside to the purchase price of the option. In the case of a litigation rights purchase, a litigant with a bullish view of litigation can pay original claim holders a fraction of the market price of the physical shares to purchase the litigation rights, thus achieving the same exposure to an eventual award as if they owned the shares outright. This transaction is further like the purchase of an option in that risk is limited to the purchase price of the litigation rights. The similarities between the purchase of a call option and a litigation rights purchase have led this author to term the purchase of litigation rights the use of litigation leverage.

This Article will present a roadmap for those investors who seek to minimize their risk and maximize their return when using litigation leverage. Part I of this Article will describe the successful use of purchasing litigation rights as seen in Emerging Communications. For those investors who remain wary of such a strategy, this Article will explain why engaging in litigation leverage is something that should be considered by all sophisticated shareholders seeking to maximize their return on investment in litigation. Part II of this Article will discuss the strategic ways those using litigation leverage can avoid one of the major legal obstacles that is present in the context of litigation rights purchases - the defense of champerty. Part III will discuss how the standing requirements for derivative suits will present unique obstacles that may limit the successful use of litigation leverage. Finally, Part IV of this Article will present other hazards inherent in the use of litigation leverage and offer strategies for avoiding these risks. Those who appreciate the potential for great upside presented by the use of litigation leverage should feel confident that if they follow the advice of Parts H-IV, they will succeed in minimizing many of the risks of this transaction.

I. The Benefits of Litigation Leverage

Today, the benefits of using litigation leverage seem clear to those who study its use; however, the success of such a strategy was not assured when Greenlight Capital, L. P. ("Greenlight") brought a fiduciary duty action in the Delaware Court of Chancery in part on behalf of its purchase of other claim holders' litigation rights.2 For the first time in the court's history, the Delaware Court of Chancery in Emerging Communications had to consider the standing of a plaintiff who had engaged in litigation leverage.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Leveraging Litigation: How Shareholders Can Use Litigation Leverage to Double-Down on Their Investment in High-Stakes Securities Litigation
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.