Public pension fund lead plaintiffs raise settlement amounts and lower attorney fees in lawsuits stemming from mergers and acquisitions – the same positive effect that they have on federal securities class actions, according to a recent academic study.
The study by Boston University Law School Professor David Webber is based on data on all class and derivative actions filed during a six-year period in the Delaware Court of Chancery, which hears the majority of such cases.
Webber says his survey is the first to gauge the impact of pension funds’ increased involvement in mergers and acquisition suits, which generally allege breaches of fiduciary duties by directors of an acquired company. Plaintiffs in such cases seek to add value for investors by increasing the offer price, adding disclosures, or opening up the field of potential corporate suitors.
Institutional investors have long been active in federal class actions, where a 1995 law directs judges to select as lead plaintiffs those investors with the largest presumed losses, as long as they are otherwise suitable. A decade ago, the Delaware Chancery Court also began favoring institutional investors as lead plaintiffs in derivative and mergers and acquisitions lawsuits.
According to Professor Webber’s paper, which is slated for publication in the Delaware Journal of Corporate Law, institutional investors were lead plaintiffs in 41% of the deal and derivative cases filed in Delaware from November 2003 through December 2009. The study presents 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.”
In a blog post, Professor Webber said he could not rule out the possibility that his conclusions were skewed by public funds “cherry picking” those cases with the strongest chances of success. But he presented evidence against such an interpretation – specifically that “the variables that predict a public fund lead plaintiff differ from those that predict an increase in price.”
“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 in mergers and acquisitions litigation,” the study said.
As mergers and acquisitions suits have become more frequent in recent years, critics have contended that too many of them offer too few real benefits to shareholders. The study’s conclusions offer hope that the growing involvement of public pension funds will improve overall results for investors and quiet such criticism in the future.
The Webber study echoes numerous academic findings over the last decade that public pension fund leadership of federal securities class actions has increased their likelihood of success, resulted in higher recoveries, lowered attorneys’ fees and promoted more corporate governance improvements.
“The results of this study are consistent with what we know about our public pension fund clients,” said Norman Berman, the partner overseeing Berman DeValerio’s mergers and acquisition litigation practice. “They take their fiduciary roles very seriously, which serves to increase the number of successful cases and enhance the quality of the results.”
*In August 2017, our firm name changed to Berman Tabacco. Case references and content published before that date may refer to the firm under our prior name, Berman DeValerio.