The New Look of Shareholder Litigation: Acquisition-Oriented Class Actions
Thompson, Robert B., Thomas, Randall S., Vanderbilt Law Review
Shareholder litigation, as illustrated by derivative lawsuits and federal securities class actions, has generated a long-running debate that sets its possible governance benefit in monitoring corporate management against the fears of its misuse by self-selected clients and attorneys. This article provides the largest empirical study of shareholder litigation to date, examining more than 1000 fiduciary duty suits filed in Delaware in a two-year period. It finds that more than 80 percent of these cases are class actions against public companies challenging one type of director decision-whether or not to participate in a corporate acquisition. These acquisition-oriented suits are now the dominant form of corporate litigation, outnumbering by a wide margin derivative suits, the traditional shareholder litigation that is the staple of corporate law casebooks.
The acquisition-oriented class actions are a previously unstudied category of representative litigation, which permits us to shed new light on prior studies of state derivative suits and federal securities fraud class actions. These suits provide management agency costs reductions in some cases through substantial monetary settlements. The settlements leading to relief in an acquisition setting are not spread across all acquisitions complaints (including hostile, second bidder acquisitions etc.), but rather concentrated where there is a majority shareholder who is attempting to cash-out the minority interest held by public shareholders on terms that have been picked by the majority. And, within this subset, monetary settlement is more likely to occur where the initial takeover premiums was lower. The acquisition-oriented class action suits do have many of the characteristics that have been identified in other contexts as indicators of agency costs (e.g. suits filed quickly, many suits per transaction). Yet, these litigation agency costs are lower than the level of perceived costs that spurred securities fraud legislation. Placing these findings in the historical context of the debate over the value of representative shareholder litigation, this article suggests there are positive management agency costs reducing effects of acquisition-oriented class actions, while the litigation agency costs they create do not appear excessive.
Shareholder litigation is the most frequently maligned legal check on managerial misconduct within corporations.1 Derivative lawsuits and federal securities class actions are portrayed as slackers in debates over how best to control the managerial agency costs created by the separation of ownership and control in the modern corporation.2 In each instance, early hopes that these suits would effectively monitor managerial misconduct have been replaced with concerns about the size of the litigation agency costs of such representative litigation. Such litigation agency costs can arise when a self-selected plaintiffs attorney and her client are appointed to pursue the claims of an entire class of shareholders and have interests that may differ from those of the class.3
Now, however, a new form of shareholder litigation has emerged that is distinct from derivative or securities fraud claims: class action lawsuits filed under state law challenging director conduct in mergers and acquisitions. The empirical data reported in this article show that these acquisition-oriented suits are now the dominant form of corporate litigation and outnumber derivative suits by a wide margin.
Are these acquisition-oriented class actions just another deadbeat in the corporate governance debate? Should policymakers take action to cut back on the development of this new form of shareholder litigation? In this paper, we argue that, just as with derivative suits and securities fraud class actions, good policy must balance the positive managerial agency cost reducing effects of these acquisition-oriented shareholder suits against their litigation agency costs. …