The Importance of Being Dismissive: The Efficiency Role of Pleading Stage Evaluation of Shareholder Litigation

By Hamermesh, Lawrence A.; Wachter, Michael L. | Journal of Corporation Law, Spring 2017 | Go to article overview

The Importance of Being Dismissive: The Efficiency Role of Pleading Stage Evaluation of Shareholder Litigation


Hamermesh, Lawrence A., Wachter, Michael L., Journal of Corporation Law


I OVERVIEW      A. A Public Solution to the Problem of Unmeritorious         Shareholder Litigation      B. Notice Pleading, Fact Pleading, and Early Stage Triage      C. The Efficiency Role of Pleading Stage Evaluation      D. Mapping the Territory: Derivative Suits and Deal Cases II.  THE PROCEDURAL FOUNDATIONS OF PLEADING STAGE EVALUATION      A. Information Gap-Reducing Measures          1. Mechanisms of Pleading Stage Access to Information          2. Requiring Particularized Pleading          3. Considering Facts Not Specifically Pleaded in the Complaint      B. Measures to Improve the Predictive Value of Pleading Stage         Evaluation          1. Judicial Assignment          2. Disposition of Motions to Dismiss      C. Cost-Avoidance Measures III. PLEADING-STAGE EVALUATION OF REPRESENTATIVE SHAREHOLDER        LITIGATION      A. Aronson: Building the Triage System for Derivative Litigation      B. Extending the Fact Pleading Approach to Other Cases          1. Trifoods          2. Caremark and Stone v. Ritter: Fact Pleading in Oversight             Cases          3. Krim: Fact Pleading Emerges in Deal Cases          4. Dismissing Non-Revlon Revlon Cases          5. Dismissing Deal Cases Involving Controlling Stockholders             a. Claims Against Disinterested Directors             b. Sales by a Controller to a Third Party             c. Controller Freeze-Outs Conditioned on Special Committee                and Minority Stockholder Approval      C. The Evolution and Importance of the Motion to Expedite           Discovery      D. Cases Denying Motions to Dismiss, and the Promotion of           Efficient Settlements      E. Limits of Pleading Stage Evaluation of Shareholder Litigation IV.  CONCLUSION 

I. OVERVIEW

A. A Public Solution to the Problem of Unmeritorious Shareholder Litigation

The torrid pace of recent merger and acquisition activity has heartened--and enriched--the lawyers, bankers, and financial advisers who negotiate, craft, and finance those transactions. (1) At the same time, however, many observers have noted and criticized the fact that litigation by shareholders challenging those transactions has become ubiquitous: at least until recently, almost every deal valued at over $100 million was subjected to litigation. (2) Given the size of the financial stakes involved, and the prospect that even modestly successful litigation in that arena can yield substantial fee awards for the plaintiffs' counsel who initiate it, (3) the frequency of such litigation is not surprising. The rampant phenomenon of early settlements of such litigation, however, usually for modified disclosure only, (4) with no improvement in the deal price, has led some to claim that Delaware "hasn't done enough to curb" a "growing tide of shareholder litigation," (5) and that such litigation amounts to a wasteful "merger tax" ultimately borne by shareholders and collected by the plaintiffs' class action bar. (6)

A tax on mergers, however, is not a deadweight loss to the system if the litigation that it funds encourages managerial conduct that enhances shareholder value. But that enhancement could be more than offset if corporate defendants (and, indirectly, their shareholders) were required to bear the substantial costs of discovery and trial (or pay substantial plaintiff's attorneys fees in settlements to avoid such costs) in cases with little or no merit. And given the high percentages of deal transactions that lead to complaints, it would be difficult to conclude that all deal litigation has substantial merit. That problem, in turn, presents the central conundrum addressed in this Article: how can the corporate litigation system separate meritorious shareholder derivative and deal claims from those that lack merit, and do so early enough in the proceedings to avoid the costs of discovery and trial?

One possible approach surfaced prominently after the Delaware Supreme Court's 2014 opinion in ATP Tour Inc. …

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