M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Thursday, March 18, 2010

Frequent Filers

Vice Chancellor Laster of the Delaware Chancery Court is apparently not impressed by attorneys who are able to file lawsuits within minutes sometimes of a merger's announcement – “frequent filers.”  I wonder if one can get a concierge card after 100 lawsuits?  In any event, VC Laster recently replaced lead counsel in a case against Revlon and order new counsel to investigate the work of the previous lead counsel.  According to Reuters in doing so VC Laster said: 

"Their advocacy has been non-existent. ... When forced to defend their conduct and leadership role, original plaintiffs' counsel approached the concept of candor to the tribunal as if attempting to sell me a used car."

In replacing the lead counsel, VC Laster is doing something about a problem that people have long talked about.  Although there are many salutary effects of shareholder litigation such as a check on management power and abuse, there are also downsides.  In particular is the tendency for shareholder litigation to fall victim to agency problems when the attorneys drive the litigation without regard to needs of their ostensible principals - the shareholders.  This is an old problem with hardly a simple solution.  

Thompson and Thomas have a good paper on the issue, The New Look of Shareholder Litigation, that appeared some years ago in the Vanderbilt Law Review.  They do an empirical study of merger related litigation.  While they find some abuses, on balance, they come out in favor of shareholder litigation:

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.

The PSLRA included lead counsel provisions to attempt to deal with this problem with some success.  Maybe VC Laster has stumbled on to another avenue for constraining abuses – a more active bench.



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