Private Policing of Mergers and Acquisitions: An Empirical Assessment of Institutional Lead Plaintiffs in Transactional Class and Derivative Actions
77 Pages Posted: 7 Jul 2011 Last revised: 20 Apr 2014
Date Written: June 24, 2013
Transactional class and derivative actions have long been controversial in both the popular and the academic literatures. Yet, the debate over such litigation has thus far neglected to consider a change in legal technology, adopted in Delaware a dozen years ago, favoring selection of institutional investors as lead plaintiffs in these cases. This Article fills that gap, offering new insights into the utility of mergers and acquisitions litigation. Based on a hand-collected dataset of all Delaware class and derivative actions filed from November 1, 2003 to December 31, 2009, I find that institutional investors play as large of a role in these cases as they do in federal securities fraud class actions, leading 41% of them. Controlling for the size of the deal and other factors, institutions have been more likely to assume a lead role in cases with lower premiums over the trading price, at least until the collapse of Lehman Brothers in September 2008, at which point most institutional types increased their litigation activity and sued in higher premium deals too. Other case and deal characteristics significantly predict institutional lead plaintiffs, such as the number of complaints filed in the case (an illustration of lead plaintiff competitiveness), the length of the complaint (a measure of attorney effort), whether the transaction is cash-for-stock, the market capitalization of the target, and the presence of "Go-Shop" provisions (which negatively correlate with institutional lead plaintiffs). I also find that public-pension funds, in particular, target controlling shareholder transactions.
I present evidence that public-pension funds, alone among institutional types, statistically significantly correlate with the outcomes of greatest interest to shareholders — both an increase in the offer price and lower attorneys' fees. The improvement in offer price associated with public-pension funds may be because they are better shareholder representatives. It may also be because they "cherry-pick" the best cases, although I offer some evidence against this hypothesis. These results are consistent with the view that public-pension funds outperform traditional lead plaintiffs as monitors of class counsel and that they reduce agency costs for shareholders in mergers-and-acquisitions litigation.
Keywords: mergers and acquisitions, litigation, lead plaintiffs, institutional investors, shareholder litigation, shareholder activism
JEL Classification: G23, G34, K22, K41
Suggested Citation: Suggested Citation