The New Look of Shareholder Litigation: Acquisition-Oriented Class Actions
Thomas, Randall S., 1955-
Thompson, Robert B., 1949-
Shareholder litigation is the most frequently maligned legal check on managerial misconduct within corporations. 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. In each instance, early hopes these suits would effectively monitor managerial misconduct have been replaced with concerns about the size of the litigation agency costs of such representative litigation, which can arise when a self-selected plaintiff's attorney and her client that are appointed to pursue the claims of an entire class of shareholders have interests that may differ from those of the class. 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, outnumbering 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 management agency cost reducing effects of these acquisition-oriented shareholder suits against their litigation agency costs. This new breed of suits has positive management agency cost reducing effects that may offset the litigation agency costs that accompany them. Our data set of all 1000 corporate fiduciary duty cases filed in Delaware in 1999 and 2000 is the largest empirical study of shareholder litigation. We find that more than 80% of these cases are class actions against public companies challenging one type of director decision - whether or not to participate in a corporate acquisition. By contrast, derivative suits, the traditional shareholder litigation that is the staple of corporate law casebooks, make up only about 14% of all fiduciary duty suits. The acquisition-oriented class actions are a new, previously unstudied category of representative litigation, an area long dominated by studies of state derivative suits and federal securities fraud class actions. We find these suits do provide some management agency costs reductions, but these are concentrated in only one subset of the suits that are brought. 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. On the opposite side of the equation - whether these suits possess high litigation agency costs - we find conflicting evidence. The acquisition-oriented class action suits have many 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 below the level of perceived costs that spurred securities fraud legislation. Placing our findings in the historical context of the debate over the value of representative shareholder litigation, we believe that the positive management agency cost reducing effects of acquisition-oriented class actions are substantial, while the litigation agency costs they create do not appear excessive. For these suits, we therefore disagree with earlier studies that have claimed that all representative shareholder litigation has little, if any, effect in reducing management agency costs and should be evaluated solely in terms of its litigation agency costs.