It is now well-established that pretty much every M&A deal attracts at least one lawsuit from a shareholder objecting to the transaction. According to research by Notre Dame business professor Matthew Cain and Ohio State law professor Steven Davidoff, 97.3% of all takeovers in 2013 with a value of over $100 million experienced at least one shareholder lawsuit. The lawsuits usually are filed almost immediately after the transaction is announced. Whether or not all of the transactions actually warrant litigation is a topic worthy of a separate blog post, but the fact is that in each case at least one shareholder is prepared to allow his or her name to be put on the lawsuit — which in turns raises the question of how it comes about that the shareholders in whose name the lawsuits are filed become plaintiffs in these cases.
The role of the named plaintiffs in these cases is an interesting one, and anyone interested in the topic will want to review Reuters reporter Tom Hals’ February 18, 2015 Special Report entitled “TV Stock Picker Leads Onslaught of Class Action Suits” (here). In his article, Hals take a close look at the M&A litigation blitz that has been waged in the name of Hilary Kramer, an investment newsletter author who has published a number of financial books and articles and who appears on Fox Business News.
Kramer, Hals reports, is “the most litigious of all American individual investors who have sued to block buyout deals,” according to a Reuters analysis of court cases dating back to 2011.
According to Hals, Kramer has been the named plaintiff in over 40 merger objection lawsuits since 2011. At least six more were filed either by her husband or her hedge fund, Greentech Research. Their total of 46 lawsuits, which were filed in 17 states, is at least 50 percent greater than that of the individual who had filed the second-most lawsuits in the Reuters analysis. Most of the cases were filed within six days of the deal announcement and settled within two months of being filed. In all of the cases, Kramer, her husband and her firm were represented by the same law firm.
Kramer and her husband were appointed lead plaintiff or co-lead plaintiff at least 19 times. Fifteen of the 19 cases in which she or her husband were named as lead or co-lead plaintiff settled for the disclosure of more details about the deal negotiations, with no money going to shareholders. The four other cases were dismissed at the plaintiffs’ request.
While neither the shareholders nor the companies involved in Kramer’s lawsuits received any payment in the settlements of these cases, the law firm that filed all of the lawsuits earned at least $14 million in fees in the cases in which Kramer or her husband had the lead role.
As Hals puts it, “it is unclear exactly what Kramer gained from all this.” Hals found from searching court records only once instance where Kramer received a payment, a $2,000 fee award given by a California judge to compensate her for her time in one of the lawsuits she filed. Kramer told Hals that she was upset by the terms of the transactions that led to the lawsuits she filed. She also said that she wanted to show the subscribers to her newsletter that “I’m going to flex my muscles and show strength and lead for them.”
However, Hals was able to find only one reference to an investor lawsuit in her investor newsletter; in December 2011 she mentioned in connection with the sale of the Morton’s Restaurant Group that “an investor has sued” but that “these types of suits almost never have any impact.” Hals notes that Kramer did not mention in the newsletter that she was the investor who brought the suit.
Hals also recounts an instance where one day after “trumpeting” a buyout in her newsletter, Kramer filed a lawsuit against the company involved, alleged that the company had agreed to a sale price so low that it would cause shareholders “irreparable harm.”
There are a number of problems when a single investor becomes a serial plaintiff. The first is that it creates the impression that the law firm is making use of the plaintiff rather than the other way around. In his article, Hals recounts that in a 2013 hearing , then Delaware Chancellor Leo Strine refused to accept a settlement in a merger objection case that Kramer had filed. The lawsuit related to a merger transaction involving Transatlantic Holdings, a company in which Kramer held only two shares. Strine reportedly said, of Kramer’s small holdings in the company, “I think that makes plaintiff Kramer not typical of any kind of rational investor in the company,” adding that “I don’t have any confidence, unfortunately, that there is a real plaintiff behind this.” Kramer told Reuters that she was unaware of Strine’s ruling and that she was a valid investor advocating on behalf of other Transatlantic shareholders.
There have been more insidious relations between plaintiffs firms and repeat plaintiffs in the past. As Hals notes in his article, several partners of the Milberg Weiss law firm were indicted in 2006 based on allegations of improper kickbacks from the law firm to plaintiffs on whose behalf the firm had filed lawsuits.
Hals says that in an interview, Kramer said she did not receive any money from the plaintiff law firm that who filed the suits on her behalf.
Hals’s article quotes a lawyer from the law firm that represented Kramer in the merger objection lawsuits as saying that “Kramer is a sophisticated investor who has pursued shareholder advocacy through litigation,” adding that “A lot of well-know activists employ the same law firms to file lawsuits against multiple companies.”
However, while it may be as the lawyer asserts that activist shareholders employ the same law firm on multiple occasions, others have raised concerns before about the reappearance of the same investor as a shareholder lawsuit plaintiff. These concerns have arisen even when the serial plaintiffs is an institutional investor, and even when the source of the objection is another plaintiff law firm.
For example, in the 2012 battle between plaintiffs’ firm to try to represent that plaintiff class in the J.P Morgan Chase “London Whale” lawsuit, one of the competing plaintiffs’ firms objected to the other firm’s involvement in the case because (as discussed in an article in Forbes at the time), the other firm represented what the objecting firm called a “professional plaintiff,” the Louisiana Municipal Policy Employers’ Retirement System. The Forbes article’s author commented that the objection “has some merit,” noting that the fund is “either the unluckiest or most litigious investor in America,” given that it has filed 49 securities lawsuits over the preceding two years, sometimes at a rate of two or three a week. On the other hand, the article’s author notes, the plaintiff that the objecting firm represented had filed more than 40 suits since 2003.
Our system of civil litigation operates on the assumption that a lawsuit begins only when an aggrieved party feels that the appropriate redress for a perceived wrong is to invoke the judicial authority of our courts. This assumption includes the expectation that a person who is motivated enough to file a lawsuit will be committed to controlling the lawsuit and to directing his or her lawyer. The presence of a serial plaintiff not only raises the inevitable question of the independence and volition of the actor on whose behalf the lawsuit nominally is brought. It also tends to undermine the seriousness or arguably even the legitimacy of the supposed wrongs that are the alleged basis of the lawsuit. When a plaintiff alleges the same legal violation over and over again, it degrades the value of allegation and threatens to bring the entire system into disrepute. More to the point, the repetition of the same allegation by the same claimant raises the question of whether there is in fact a real dispute.
There are some procedural controls that are intended to try to manage this sort of thing, at least in securities class action lawsuits filed in federal court. The Private Securities Litigation Reform Act has a provision that limits a shareholder to acting as a lead plaintiff five times in a three-year period. The concerns about the institutional investor plaintiff in the London Whale case noted above does, as the Forbes article notes, make something of a “mockery” of the rule. In addition, this provision only applies to federal court securities suits. It doesn’t apply to state court merger objection lawsuits.
While there are no state law provisions of the type found in the PSLRA that might constrain a serial merger objection lawsuit plaintiff, companies have started to take steps to try to protect themselves from these kinds of suits. Concerns about the kind of litigation that Kramer filed are what has been motivating companies to adopt litigation reform through the revision of their bylaws. For example, concern about multi-forum merger objection litigation is one of the motivations for companies to adopt forum selection bylaws. In addition, other companies have adopted “fee shifting” bylaws that would require unsuccessful claimants in shareholder suits to pay their adversaries fees. Other proposed bylaw provisions include mandatory arbitration provisions (about which refer here) and even minimum stake to sue bylaws (refer here).
Shareholder advocates may decry these kinds of litigation reform bylaws as inconsistent with shareholders rights and as inimical to shareholders’ ability to supervise company management through litigation. However, the movement toward the adoption of litigation reform bylaws is an understandable response to a situation where every transaction attracts a lawsuit. The attempt by shareholder rights activists to try to resist these provisions and to try to uphold the rights of shareholders to pursue lawsuits against company managers are seriously undermined by the situation that Tom Hals describes in his interesting and well-written article.