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An Empirical Study of Special Litigation Committees: Evidence of Management Bias and the Effect of Legal Standards

49 Pages Posted: 16 Oct 2017 Last revised: 15 Nov 2017

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: October 16, 2017

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. 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. Our findings highlight that, contrary to prior studies, there is evidence of SLC pro-management bias, and also highlight the importance of legal rules and judicial oversight of SLCs.

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: Evidence of Management Bias and the Effect of Legal Standards (October 16, 2017). Vanderbilt Law Research Paper No. 17-56. Available at SSRN: https://ssrn.com/abstract=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 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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