Sense and Nonsense About Securities Litigation

In a forthcoming article, I contend that Professor James Spindler has it wrong in his recent critique[1] of scholarly opposition to securities fraud class actions (SFCAs).  Spindler argues that the opposition is based on two mistaken ideas: (1) that compensation for securities fraud is impossible because recovery against the issuer means that defrauded buyers effectively pay themselves (the circularity critique) and (2) that most investors are diversified and thus suffer no real harm from securities fraud since buy-side losses wash out from sell-side gains on average and over time (the diversification critique).

Spindler purports to refute both of these … Read more

Senate Goes Back to the Future on Arbitration

In the movie Office Space, the (pretty) good guys hatch a plan to divert to themselves fractions of cents that their employer, Initech, has apparently been overcharging its customers by rounding billings upward. Had any customer discovered the scam, he might have filed a class action. But chances are customers agreed to arbitrate disputes and waived any right to join a class action when they signed a purchase order or clicked agree. So Initech can settle privately with any customer who complains – maybe even under a nondisclosure agreement – and need not change its billing system.

On October 24, … Read more

The Real Problem with Appraisal Arbitrage

In the controversial practice of appraisal arbitrage, activist investors buy shares of a corporation to be acquired by merger so as to assert appraisal rights challenging the merger price – which may already have been approved by the target’s stockholders. The practice is controversial because the appraisal remedy is widely seen as intended to protect existing stockholders who are forced to sell their shares in the merger and not to afford hedge funds a way to extract extra returns from the deal. But the puzzle is why appraisal arbitrage is profitable, since the remedy seeks to determine fair prices using … Read more

Majority-of-the-Minority Voting and Fairness in Freezeout Mergers

In a landmark decision now on appeal, In re MFW Shareholders Litigation, the Delaware Chancery Court ruled that a freezeout merger negotiated by an independent special negotiating committee (SNC) and conditioned in advance on approval by a majority-of-the-minority (MOM) vote should be reviewed under the business judgment rule. Before MFW, the practice was to review all such mergers for entire fairness, albeit with the burden on the plaintiff if the merger is either negotiated by an independent SNC or ratified in a fully-informed MOM vote. In contrast, review under the business judgment rule requires plaintiffs to plead and prove their … Read more

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