Control Transaction Governance: Collective Action and Asymmetric Information Problems and ex Post Policing
Why, when and how should control transactions be policed ex post and by a judiciary? This article is the first to 1) articulate the doctrinal prerequisites for effective ex post judicial policing of fiduciaries in control transactions, and 2) theoretically unify two seemingly distinct approaches to police control transactions: the ex post judicial policing in the United States and the ex ante policing by the Takeover Panel in the United Kingdom. Shareholder collective action and asymmetric information problems, and the extent of gatekeeping by fiduciaries together determine the mode of third-party interventions, such as those by judiciaries and the Takeover Panel, in control transactions. The Article’s analysis yields normative conclusions about how judiciaries in the United States, including Delaware’s, should fine-tune gatekeeping by corporate fiduciaries in control transactions. It predicts that multijurisdictional shareholder litigation that seeks anticipatory adjudication will produce negative consequences. Further, it gives policy makers outside of the United States the theoretical foundation for crafting third-party interventions in both types of control transactions, i.e., third-party acquisitions of control and controller freeze-outs, that are optimal for their own jurisdictions.
File Early, Then Free Ride: How Delaware Law (Mis)Shapes Shareholder Class Actions
Delaware courts largely have privatized enforcement of fiduciary duties in public corporations and have expressly acknowledged this judicial policy. The Delaware courts also recognize that so encouraging private enforcement creates an obvious danger: Plaintiffs' attorneys, especially in class actions where there is no strongly interested plaintiff, may make litigation-related decisions primarily with a view to advancing their own economic interests, rather than advancing the interests of the corporation or shareholders that they purport to represent. Such decisions have the potential to impose substantial, litigation-related agency costs on corporations, shareholders and the courts, if not appropriately curbed through judicial monitoring of settlements and fee awards. This paper examines the development of Delaware law with respect to merger-related class actions, which have become the dominant form of shareholder litigation in Delaware. We offer two broad alternative hypotheses as to what drives merger-related class actions in Delaware: a "shareholder champion" hypothesis, and a "self-interested litigator" hypothesis. We then examine intensively all large mergers in 1999-2001 where the target was a publicly traded Delaware company, and all class actions filed with respect to those mergers. We conduct statistical analyses as well as a detailed qualitative analysis of the 104 class actions filed during those years. The pattern that we observe is redolent of a pattern of opportunistic filings, of a lawyer-driven process rather than a true client-driven process: systematic behavior with respect to which mergers were challenged; early and frequent complaints filed; a very high percentage of dismissed cases never reached a judgment on the merits; the absence of a single case that has been decided in favor of the plaintiffs on the merits; settlements tending to reflect free riding by plaintiffs' attorneys; plaintiffs' attorneys failing to challenge special negotiating committees' decisions or competing offers; attorneys with "real" clients and from outside the "traditional" Delaware plaintiffs' bar who were far more vigorous in their litigation efforts; no settlements overturned by the Delaware courts; plaintiffs' attorneys' fee awards in settlements usually paid by defendants and not out of common funds, and largely unchallenged; and plaintiffs' attorneys' fees representing a strikingly low percentage of claimed recoveries (but attractive on an hourly basis), which may well indicate that the attorneys added little value to the recoveries. We then offer suggestions as to changes in pleading standards and the Delaware courts' approach to reviewing settlements and plaintiffs' attorneys' fees that would help curb the excesses of class action litigation without seriously undermining the constructive role that plaintiffs' attorneys have the potential to play in policing corporate mis-governance with respect to mergers.
The Contemporary Function of the Class Suit
T HE WIDE diffusion of securities has created a situation where the single and isolated security holder usually is helpless in protecting his own interests or pleading his own cause," reported the Securities and Exchange Commission in I937.' "The plight of the individual investor," the commission added, "is accentuated where he is uninformed and unskilled in the intricacies of finance. It is likewise accentu-