The sharp increase in mergers and acquisitions litigation has generated widespread skepticism about the utility of such cases and, along with it, skepticism about the role played by the plaintiffs’ law firms that bring them. Deal suits are broadly perceived to be shakedowns by plaintiffs’ law firms seeking a quick settlement and an attorneys’ fee. Even cases that appear to result in a positive outcome for shareholders of the target company—most notably, an improvement in the offer price—are explained away by law firm skeptics as having been the inevitable result of deal and market conditions, not plaintiffs’ law firms themselves. In our article, “Does the Quality of the Plaintiffs’ Law Firm Matter in Deal Litigation?” we empirically assess the question of whether the market values the plaintiffs’ firms that bring these suits. We find that when top quality plaintiffs’ law firms file suit in a deal case, investors react positively, and that when poor quality firms (and no top firms) sue, investors react negatively. We find this evidence where we would most expect to find it: in the most conflict-ridden transactions, specifically, in management buyouts and controlling shareholder deals. Because of the usual set of concerns raised by such deals—the ability of an “insider acquirer” to favorably time an acquisition or otherwise undermine the interests of minority shareholders—such deals invite both increased market scrutiny and additional legal protections. Law firm quality matters, in such instances, at both the top and the bottom of the spectrum. Our evidence does not allow us to discern whether the market is reacting to plaintiffs’ law firm skill in case selection or case litigation or some combination of the two. But it does indicate that the quality of the firm filing the case sends a signal that markets listen to. We therefore reject the view of the law firm skeptics, and conclude that law firm quality matters in deal cases.
Our study examines a sample of deal lawsuits filed between November 2003 and December 2009. We run separate regressions on the data both including and excluding deal suits filed after the collapse of Lehman Brothers, on the theory that these suits changed markedly during the heart of the financial crisis. Including the post-Lehman data did not affect our results. Almost exactly one-third of our cases were filed within two days of the announcement of the merger, which might surprise some given the prevailing view that these suits are almost universally filed the day of, or the day following, the merger announcement. One noteworthy finding that ran counter to our expectations is that top law firms, and not poor quality firms, were associated with quick filing: top firms statistically significantly correlated with lawsuits that were filed within 48 hours of the announcement of the deal. While quick filing is popularly associated with the perception of a recklessly filed suit and a “cookie cutter” complaint, in which identical complaints may be filed in multiple cases with all but the plaintiffs’ name changed, quick filing may have another explanation. Because Delaware precedent encourages courts to consider the zeal with which the law firm(s) will prosecute the case when deciding who gets the lead counsel appointment, quick filing of a high quality, non-“cookie cutter” complaint may signal to the court that the law firm will prosecute the case with the requisite attention. Regardless, top firms correlate with quick filing.
This brings us to the question of how we measured law firm quality. We used several metrics to assess questions of firm quality. For top law firms, we utilized the annual Securities Class Action Services list of the plaintiffs’ firms with the highest aggregate settlements. Securities and merger cases are different, but many of the securities firms have merger practice groups, and because both securities class actions and deal cases rely on assessment of law firm quality for lead plaintiff and lead counsel selection, firms can be expected to care about the reputation of both practice areas. For additional assessment of top quality, we relied on the Legal 500 rankings for leading deal litigation firms, which draw on publicly available information and on private information from the law firms themselves. For the lower quality firms, we relied on a Bloomberg study examining aggregate legal fees awarded to plaintiffs’ law firms in 2010-11. The study revealed sharp distinctions between how law firms that litigated a comparable number of cases were compensated, with lower quality firms receiving far less compensation than firms at the top of the spectrum. Finally, for lower quality firms, we also examined qualitative statements made about them by sitting Delaware Chancery Court judges, specifically looking at critical comments made about certain firms by judges on the record. Such criticisms are unusual, if not extraordinary, and reflect the judges’ views of the quality of the firms appearing before them.
A legitimate concern about an event study like ours is whether we can tease out the market reaction to law firm quality from everything else that the market is reacting to when the deal is announced, like deal characteristics. We think we have identified the appropriate controls to cope with this concern. But as a robustness check, we reran our regressions including only cases in which the suit was filed more than two days after the deal was announced, on the theory that two days is sufficient time for the market to react to deal and other information, temporally distancing the filing of suit from the announcement of the deal itself. Even two days later, our results persist.
This post comes to us from Adam B. Badawi, Professor, Washington University in St. Louis School of Law, and David H. Webber, Associate Professor, Boston University School of Law. The post is based on their article, which is entitled “Does the Quality of the Plaintiffs’ Law Firm Matter in Deal Litigation?” and available here.