Hillary A. Sale

Simple. The lawyers. Cases will take longer to settle, litigation will be prolonged, and the outcome will be more legal fees – with no indication that it will actually improve outcomes.

There’s a certain irony in all of this – after all, the lawyers on the side of the defendants who argued in favor of limiting the fraud on the market presumption stood to lose a lot. Indeed, the elimination of the doctrine would have had dramatic implications for the class action practice of securities litigation. Now, those same lawyers stand to win. How?

Let’s take a step back to the 1995 Private Securities Litigation Reform Act, and the role that it played in securities litigation. One of the key aspects of that legislation was the heightened pleading standard. By all accounts, the heightened pleading standard made it more difficult for cases to survive a motion to dismiss. One result was increased settlement value for the cases that do survive that far, arguably those more likely associated with securities law violations. Another result has been increased litigation of other aspects of the cases – and, therefore, more legal fees – on an hourly basis for the defense-side lawyers.

So, what now? Well, Halliburton in even its most narrow form allows for more litigation at the class certification stage but may not cull cases before settlement the way that the PSLRA did. Instead, the focus will now be on market efficiency, and the pre-settlement litigation will be prolonged.

Who will pay for all of this litigation? The shareholders. When cases settle under the policy limits, the shareholders pay, but indirectly, through insurance costs. Now, arguably, the incentive to litigate to the policy limits has increased. If the lawyers and econometricians exhaust the insurance policy, however, and the claims have merit, the plaintiffs will have settlement leverage. The result will be settlements paid by the entity (and not usually the individuals), and the shareholders will pay more directly for the costs of the settlement. So the lawyers win, as do the econometricians, but the shareholders lose.

Hillary A. Sale is the Walter D. Coles Professor of Law and Professor of Management at Washington University in St. Louis.

In my recent article, Public Governance, I develop a theory of public governance as a form of publicness by exploring corporate governance and decision making, and developing them with a more textured understanding of the nature of corporations and their role. I do so through the lens of Sarbanes-Oxley and Dodd-Frank and by deconstructing the “private” zone and reconceiving it with an understanding of publicness.

The term “publicness,” as used in the article, means the shift in the federal and state balance of power and the resulting growth of public governance. But, I envision the term to be broader in many contexts and have used it in a prior piece (available here) to refer to the relationship of corporations to the various actors that both run and influence them.

I argue that corporate actors who govern without a deeper understanding of their impact on society lose their self-regulation privileges. The most recent increase in the federalization of corporate governance occurred when corporate actors failed to exercise their choices with an understanding of the nature of publicness. They took private ordering for granted. They treated it as a right rather than a privilege. They failed to grasp the actual and potential roles of the media, stakeholders, politicians, and others who wanted changes in the distribution of corporate power and who could succeed after scandals. Publicness, both as a process and an outcome, grows when corporate actors are greedy, when they cheat, and when they fail. The resulting crises and scandals become the vehicle for publicness.

Simply put, corporate failures expose “private” choices. Actors outside of the corporation and Wall Street scrutinize the failures. Think Occupy Wall Street and bloggers more generally. The scrutiny and concomitant increase in publicness make transparent the privileged nature of the corporate private zone. They reveal the lawmakers’ choices about private ordering and self-regulation. They highlight the spaces not yet legally defined: those that were omitted. They create pressure for more reform and public governance. The result is more publicness.

My full article, Public Governance, which was recently published in the George Washington Law Review, is available here.

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