Victory in the Seventh Circuit

As both Daniel Fisher and the Economist documented recently, the percentage of M&A transactions worth over $500 million that result in shareholder derivative suits has risen from 39% to 96%. [Fisher; Economist; Reuters (quoting me); OL; see also Johnson @ SSRN]

It's surely not the case that every merger is the result of a breach of fiduciary duty. What's happening is that entrepreneurial lawyers have discovered a profitable means of rent-seeking: with the help of a cooperative shareholder, bring a meritless shareholder derivative suit on some technical ground or the other, threaten to impose millions of dollars of discovery expenses and hassle on the officers and directors of the company, and collect an attorneys' fee for settling the case for a token change of no benefit to the shareholders. As I told Reuters in 2011, "Judges should consider whether these provisions actually create value for shareholders, or amount to a rearranging of the deck chairs to create the illusion of value to justify attorneys' fees."

Under FRCP 23.1(a) and its state-law equivalents, a shareholder derivative suit isn't supposed to proceed unless the shareholders bringing the suit adequately represent the shareholders. If the suit is meant to profit the plaintiffs' lawyers at the expense of the corporation (and thus the shareholders), how can the bringers of a strike suit be adequate representatives of the shareholders? I've thus argued that the correct role for courts in such situations is to throw these cases out entirely (or approve the settlement but award only a token amount in attorneys' fees).

I found myself the "beneficiary" of one of these $0 strike-suit settlements in Robert F. Booth Trust v. Crowley; the settlement would have paid the attorneys $925,000 under a clear-sailing clause, and, when the district court rejected my attempt to intervene to dismiss the suit, I appealed to the Seventh Circuit. 

Yesterday, I won a complete victory with a landmark Frank Easterbrook opinion that I hope will provide protection for shareholders against future shareholder derivative strike suits. The suit, the Court said, "serves no goal other than to move money from the corporate treasury to the attorneys’ coffers.... It is an abuse of the legal system to cram unnecessary litigation down the throats of firms ... and then use the high costs ... to extort settlements (including undeserved attorneys’ fees) from the targets." It thus reversed the district court's denial of my motion to intervene, and remanded with instructions to dismiss the case, as I had asked below. [Reuters; Fisher @ Forbes; analysis by Wolfman; WSJ Law Blog (failing to recognize that the case involves a lawyer they profiled in October); Bashman; Overlawyered; Litigation Daily ($) ("Ted Frank, the indefatigable scourge of underwhelming class action settlements, scored a remarkable win on Wednesday"); Volokh on a punctuational quirk] 

This is the fifth federal appellate opinion in a CCAF case; CCAF is now 4-1 in federal appeals, which is remarkable, given that CCAF-affiliated attorneys represent the appellant in each case and there are rarely as many as four reversals of class action settlement-related district court opinions in a single year from all objectors combined.

CCAF is assisting an objector in a Texas-state-court strike suit currently on appeal, and we hope to extend this precedent to other state courts. The main difficulty we face is that individual investors rarely get adequate notice of these bad settlements: courts condone notice provisions that virtually guarantee that an investor who uses a broker will not get notice in time to file an objection. (In the Sears case, I benefited because of a rare agreement to extend notice at the district court level.) We would like to work with institutional investors to promote this precedent and put an end to the practice of rent-seeking strike suits that hurt shareholders. Please contact me if this describes and interests you.

Some case updates

• In Lonardo v. Travelers Insurance, our objection resulted in a $2 million improvement in the settlement. We maintained the objection, and the court approved the settlement; we straightforwardly acknowledged that the court "could" approve the improved settlement (where the attorneys got nearly as much as the class as opposed to more than twice as much) under its discretionary powers, but "shouldn't," and the court found that offensive for some reason. To add insult to injury, the court preemptively made findings that we weren't entitled to even ask for attorneys' fees for our role in improving the settlement. On a motion to reconsider, the court begrudgingly awarded attorneys' fees, and then proceeded to come up with bad dicta that suggests that objectors are obligated to engage in expensive discovery about settlement negotiations before they are completed. (The scenario where a settlement is improved by 71% on the eve of the fairness hearing is rare enough that one hopes that does not matter; it's pretty clear that settling parties would object to the discovery that would produce the evidence that the Lonardo court says is required.) The $40,000 in fees is nice, but it was unfortunate that the court felt the need to insult us along the way; we made it clear that there was substantial work we performed on the case for which we were not seeking fees, and the court repeatedly implied that the only thing we did were the few dozen hours we requested fees for. We did get the court to acknowledge that Perdue v. Kenny A. applies to class-action attorney-fee requests (though that does not explain why the court awarded a 1.4 multiplier to the plaintiffs' attorneys). If those opinions were issued today, when we have a diversified donor base, we would have appealed. At the time, we were low on funds, and had to make a triage decision to save our powder for more egregiously bad decisions. Judging by Google hits, class members have started to receive their checks, which are 71% larger than they would have been without our objection.
  
• In the Sears case, the court denied our motion to dismiss and our motion to intervene, the latter because we sought to appeal, and therefore were "obstructive." That reasoning begs the question when one is entitled to move to intervene for purposes of appeal; the court did not cite the leading Seventh Circuit case on the issue. We will appeal: we believe Devlin gives us standing to do so, and, in any event, the denial of the motion to intervene was clearly erroneous. I am excited about this appeal, as it will give the Seventh Circuit the chance to clarify the law of derivative shareholder lawsuits and whether it is appropriate to bring them for the primary purpose of extracting attorneys' fees.
  
• I'm also enthused about our chances in the Dewey v. Volkswagen appeal to the Third Circuit. The plaintiffs have requested a punitive appeal bond, and the district court will rule on that in October. I'll have a post about that later in the week.
  
• Alas, I will not be participating in another appeal I was confident about, the Ninth Circuit Yahoo! appeal.  As you know, the Center for Class Action Fairness refuses to settle a class action objection unless the withdrawal of the objection results in a settlement that is fair, adequate, and reasonable. Our clients disagreed with that approach, and we have withdrawn as counsel. We did not ask for and will not accept any fees in that representation.