The changing mix of corporate and securities litigation
is a recent phenomenon on which I have frequently
commented on this blog. While identifying the fact of the change is
relatively straightforward, explaining it is more challenging. According to a
January 11, 2012 article in The Review of Securities & Commodities
Regulation entitled "Shareholder Litigation After the Fall of an Iron
Curtain" (here), written
Feldman of the Wilson Sonsini
law firm, the changing pattern in corporate and securities litigation filings
is a result of changes in the plaintiffs' securities litigation bar -
particularly to the closing of the dominant plaintiffs' firm. These changes,
according to Feldman, have resulted in the five recent securities litigation
trends he identifies in his article.
For many years, according to the article, the Milberg
Weiss law firm was the "dominant securities plaintiffs' law firm." Even after
it split into two separate law firms on the East and West Coasts, it was,
according to Feldman, "the 800-pound gorilla of the shareholder litigation
jungle." In addition to dominating t he litigation, the firm "exercised some
discipline" on the rest of the plaintiffs' securities bar, demonstrating
"substantial influence over smaller firms and parvenus."
Now, "for reasons of retirement and incarceration,"
the familiar patterns of the past have been disrupted. Feldman analogizes this
disruption in the standard order of the securities litigation world to the
disruptions that followed in the political world in the wake of the fall of the
Without a dominant firm, smaller firms are now "free
agents," and new entrants have appeared. These smaller and newer players are
"less predictable (and often less rational)." According to Feldman, these
changes in the plaintiffs' bar explain five trends in shareholder litigation he
identifies in his article.
First, Feldman notes the recent rise in
multi-jurisdiction litigation, where a single company can face multiple suits
in different jurisdictions arising out of the identical factual circumstances.
Feldman notes that although this might have happened from time to time in the
past, when it did, the plaintiffs firms worked things out among themselves. But
this is far less common now. Instead, firms that have "decided they have a
better shot at participating in the litigation" have consciously chosen to file
outside the company's home jurisdiction, particularly in connection with
shareholder derivative litigation. This multiplication of litigation has forced
corporate defendants to have to defend themselves in multiple courts, resulting
in added expense and uncertainty.
The second trend Feldman notes is the proliferation of
demand letters. In the past, plaintiffs would bypass this statutory
prerequisite to the filing of derivative litigation, out of a concern that the
demand represented a concession that demand was not futile. More recently, however,
demand letters have become "fashionable," as secondary players, eager "to get
in on the action," will submit a demand even if derivative litigation has
already been filed. Feldman notes that this may "actually be advantageous to
defendants," as courts will often stay derivative litigation while the
defendant company considers the demand.
Third, Feldman notes the rise of derivative litigation
paralleling shareholder class action lawsuits. In the past, the type of stock
drop that would trigger a 10b-5 class action would not also spawn a derivative
suit, at least in the absence of a major accounting problem and restatement.
Now, parallel derivative suits are "de rigeuer." The plaintiffs bar
now "just cannot resist cribbing the class complaints," even though the
company's setback does not suggest any breach by the company's board. This
change is attributable to a simple explanation: "different suits for different
The fourth trend Feldman notes is the automatic filing of
litigation when a merger is announced. When "giants roamed the earth," there
was still merger objection litigation, but not every single time a merger was
announced. Now the litigation is pervasive and it follows a standard pattern of
an initial suit alleging a breach of fiduciary duty after the deal is
announced, followed by an amended complaint alleging disclosure violations
after the proxy has been filed. The other change Feldman notes about this
litigation is that in the past, the litigation went away once the deal closed,
as the defendants defeated the preliminary injunction seeking to block the
deal. Now the merger suits are increasingly surviving the closing, based on
amended allegations that "range from weak to laughable." Though few of these
suits result in a payout, the plaintiffs' lawyers "persist," seeking "a place
in the sun.'
Finally, Feldman notes the rise in actions under Section 220 f the
Delaware Code seeking to inspect the corporate defendant's books and records.
Feldman says there has been more of this litigation in the past year than in
all prior recorded history. In part this rise is due to encouragement from
members of the Delaware judiciary. But this rise is also attributable to a
cottage industry of plaintiffs' firms eager to "get in on the action."
Defendant companies find these suits impossible to avoid; whatever they
produce, the plaintiffs ask for more until they have "created an impasse and
gotten a ticket to sue." Feldman suggests that this "epidemic" of Section 220
litigation is "unlikely to be solved without intervention by the Delaware
Feldman closes by suggesting that in the current, rapidly
changing world, the "more fragmented world of plaintiffs' securities lawyers
will continue to amaze and surprise us with their innovation and resilience."
Very special thanks to Boris Feldman for sending me a
link to his article.
other items of interest from the world of directors & officers liability,
with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
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