An Empirical Study of Special Litigation Committees

52 Pages Posted: 16 Oct 2017 Last revised: 23 Jan 2018

C. N. V. Krishnan

Case Western Reserve University - Department of Banking & Finance

Steven Davidoff Solomon

University of California, Berkeley - School of Law; University of California, Berkeley - Berkeley Center for Law, Business and the Economy

Randall S. Thomas

Vanderbilt University - Law School; European Corporate Governance Institute (ECGI)

Date Written: January 22, 2018

Abstract

We examine whether special litigation committees (SLCs) act independently or favor management interests with a focus on how legal rules affect SLC outcomes. We compile a hand-collected sample of SLC associated lawsuits spanning a 26-year period from Jan 1, 1990 through Dec 31, 2015. We find evidence that SLC reports are most likely to recommend case dismissal, that such a recommendation is significantly and positively associated with the probability of the case being dismissed, and significantly and negatively associated with probability of case settlement, even after controlling for lawsuit reasons, legal standards, and time fixed effects. However, we find evidence that SLCs reports systematically underestimate the likelihood that cases will settle. We also find that SLC reports to dismiss are filed with significantly higher frequency when all defendants are current or former directors as compared to the rest of the cases, but actual dismissals occur with significantly higher frequency when any defendant is an entity other than the defendant firm as compared to all other cases, providing some evidence that SLCs tend to favor their fellow directors and officers. In robustness tests which account for possible selection effects in SLC cases, we also find that law matters for SLC outcomes: incorporation in Delaware and a lawsuit filed in Delaware courts are both significantly associated with a lower probability of the SLC report recommending dismissal of the case, and a motion to dismiss filed by a SLC. We find that actual case dismissals are the lowest amongst all jurisdictions in Delaware suits. In states with the lowest legal standards for SLC judicial review, SLC’s cases are more likely to be dismissed. While our findings are subject to selection effects and differing interpretations, our findings highlight that, contrary to prior studies, there is evidence of SLC pro-management bias, and legal rules and judicial oversight of SLCs are important.

Keywords: SLC, Special Litigation Committee, Lawsuits, Settlement, Case Dismissal, Case Settlements, High Value Settlements, Delaware courts, Legal Standards, SLC Reports, Report recommending dismissal.

JEL Classification: K41, G39

Suggested Citation

Krishnan, C. N. V. and Davidoff Solomon, Steven and Thomas, Randall S., An Empirical Study of Special Litigation Committees (January 22, 2018). Vanderbilt Law Research Paper No. 17-56. Available at SSRN: https://ssrn.com/abstract=3053449 or http://dx.doi.org/10.2139/ssrn.3053449

C. N. V. Krishnan (Contact Author)

Case Western Reserve University - Department of Banking & Finance ( email )

10900 Euclid Ave.
PBL 363
Cleveland, OH 44106-7235
United States
216-368-2116 (Phone)

HOME PAGE: http://weatherhead.case.edu/faculty/c-n-v-krishnan

Steven Davidoff Solomon

University of California, Berkeley - School of Law ( email )

215 Boalt Hall
Berkeley, CA 94720-7200
United States

University of California, Berkeley - Berkeley Center for Law, Business and the Economy ( email )

Berkeley, CA 94720-7200

Randall S. Thomas

Vanderbilt University - Law School ( email )

131 21st Avenue South
Nashville, TN 37203-1181
United States

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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