A Great Game: The Dynamics of State Competition and Litigation

• Author: Matthew D. Cain & Steven Davidoff Solomon
• Position: Economic Fellow, U.S. Securities and Exchange Commission, Division of Economic and Risk Analysis/Professor of Law, University of California, Berkeley School of Law
• Pages: 465-500

A Great Game: The Dynamics of State Competition and Litigation Matthew D. Cain  & Steven Davidoff Solomon  ABSTRACT: We theorize a multi-dimensional picture of jurisdictional competition for corporate litigation. We test this theory by examining merger litigation in a hand-collected sample of 1117 takeovers from 2005 to 2011. We find evidence of state competition for merger litigation. Entrepreneurial plaintiffs’ attorneys drive this competition by bringing suits in jurisdictions which have previously awarded more favorable judgments and higher fees and by avoiding unfavorable jurisdictions. States with an apparent interest in attracting corporate litigation respond in-kind by adjusting judgments and awards to re-attract litigation. These states award higher attorneys’ fees and dismiss fewer cases when attorneys have been migrating to other jurisdictions. Our findings illuminate the dynamics and existence of jurisdictional competition for corporate litigation.  Economic Fellow, U.S. Securities and Exchange Commission, Division of Economic and Risk Analysis. The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or of the author’s colleagues upon the staff of the Commission.  Professor of Law, University of California, Berkeley School of Law. The authors would like to thank participants at the 2012 annual meeting of the American Law and Economics Association and workshop participants at the University of California, Berkeley School of Law, Vanderbilt School of Law, University of Virginia School of Law, The Institute for Law and Economics at the University of Pennsylvania, and the Transactional Law Workshop for their helpful comments and suggestions, as well as Robert Bartlett, Bernard Black, Jill Fisch, Sean Griffith, Justin McCrary, Dale Oesterle, Randall Thomas, Paul Rose, and Lynn Stout. We also thank Russell Gray, Eugene Kozob, Jeremy Panno, and Megan Walker for their research assistance. 466 IOWA LAW REVIEW [Vol. 100:465 I. INTRODUCTION ............................................................................. 467 II. THE COMPETITION FOR CORPORATE LAW, CORPORATE CHARTERS, AND LITIGATION ........................................................................... 471 III. THE RISE AND RISE OF MERGER LITIGATION ................................ 475 A. M ERGER L ITIGATION F ROM 2005 TO 2011 ............................. 475 1. Trends over Time .......................................................... 475 2. Types of Settlements ..................................................... 477 3. Attorneys’ Fees .............................................................. 480 B. T HE M ERGER L ITIGATION C ONTROVERSY ................................. 484 IV. DATA COLLECTION AND EMPIRICAL ANALYSIS .............................. 486 A. D ATA C OMPILATION ................................................................ 486 B. E MPIRICAL A NALYSIS ............................................................... 487 V. IMPLICATIONS AND POLICY CONCLUSIONS ................................... 496 A. I MPLICATIONS FOR C OMPETITION AND C ORPORATE L ITIGATION ............................................................................ 496 B. P OLICY I MPLICATIONS FOR M ERGER L ITIGATION ...................... 498 VI. CONCLUSION ................................................................................ 499 2015] A GREAT GAME 467 I. INTRODUCTION In December 2011, Chancellor Leo E. Strine, Jr., then the chief judge of the Delaware Chancery Court—the most prominent business court in the United States—awarded the largest plaintiffs’ attorney fee in the court’s history. 1 The amount, approximately $300 million, rewarded these attorneys for obtaining a $2 billion judgment in a class-action lawsuit brought against Grupo México, S.A.B. de C.V. in connection with Grupo México’s acquisition of an 80% interest in Southern Peru Copper. 2 Chancellor Strine ruled that Grupo México abused its position as a shareholder of Southern Peru Copper to increase its ownership of the company. 3 The award was notable not only because of the amount, but also because it came only a few weeks after Chancellor Strine had deliberately and publicly promoted the Delaware Court as a friendly haven for plaintiffs’ attorneys to bring meritorious class-action litigation. 4 Professors Armour, Black, and Cheffins document evidence that Delaware may be “losing its cases” to other states, which could place its corporate preeminence at risk. 5 It is thus possible that substantial fee awards are a strategic response by courts as they attempt to compete for future class-action litigation. 6 This Article examines the parameters and existence of state competition for corporate litigation. If states have incentives to compete for corporate litigation, we theorize that the nature of that competition is multidimensional. Class-action litigation on behalf of shareholders is typically brought by entrepreneurial plaintiffs’ attorneys in state courts. 7 These attorneys often have a choice of where to bring suit, whether in the 1. The decision was In re Southern Peru Copper Corp. Shareholder Derivative Litigation , 52 A.3d 761, 819 (Del. Ch. 2011). For a discussion of the success and prominence of the Delaware courts, see generally Randy J. Holland, Delaware’s Business Courts: Litigation Leadership , 34 J. CORP. L. 771 (2009); Marcel Kahan & Edward Rock, Symbiotic Federalism and the Structure of Corporate Law , 58 VAND. L. REV. 1573, 1604–05 (2005). 2. In re S. Peru Copper Corp. , 52 A.3d at 819. 3. See id. The fee was later upheld on appeal in the Delaware Supreme Court. See Ams. Mining Corp. v. Theriault, 51 A.3d 1213, 1262–63 (Del. 2012). 4. In a symposium at Columbia Law School held in November 2011, then-Chancellor Strine asserted that the Delaware courts rewarded plaintiffs’ attorneys who litigated successful cases, noting that the chancery court had previously awarded numerous million-dollar-plus attorneys’ fee awards. See David Marcus, Delaware’s Chancery Grapples with Multijurisdictional Litigation , DAILY DEAL, Dec. 9, 2011, available at 2011 WLNR 26934635. 5. See John Armour et al., Delaware’s Balancing Act , 87 IND. L.J. 1345, 1350 (2012); John Armour et al., Is Delaware Losing Its Cases? , 9 J. EMPIRICAL LEGAL STUD. 605, 605 (2012) (“The trends we report potentially present a challenge to Delaware’s competitiveness in the market for incorporations.”). 6. See Randall S. Thomas & Robert B. Thompson, A Theory of Representative Shareholder Suits and Its Application to Multijurisdictional Litigation , 106 NW. U. L. REV. 1753, 1770–71 (2012). 7. The reason is that these claims often implicate state law and so are cited there naturally. As our statistics show, from 2005 to 2011 less than two percent of merger litigation was brought in federal court. 468 IOWA LAW REVIEW [Vol. 100:465 jurisdiction of the target’s incorporation or another location where the target has a substantial presence, such as the target’s corporate headquarters. 8 Entrepreneurial plaintiffs’ attorneys constantly recalibrate the optimal jurisdiction in which to bring litigation. 9 We theorize that the result is a dynamic competition where plaintiffs’ attorneys react to prior court decisions to bring future litigation in the most favorable forum. 10 Meanwhile, state courts, to the extent they compete to attract this litigation, respond to this movement by attempting to attract plaintiffs’ attorneys through settlements and fee awards. This Article examines how both attorneys and courts interact in this theoretical competition. It does so by examining state corporate merger litigation. Merger litigation is now the dominant form of corporation litigation. 11 This litigation almost always raises fiduciary duty issues and other important corporate law issues. 12 Because of its predominance and importance to preserving a state’s case law, merger litigation is the type which Delaware and other states are likely to compete for, to the extent they do compete. We analyze 1117 public transactions comprising all takeover deals announced and completed between 2005 and 2011 having a transaction value greater than $100 million. The sample is hand-collected by examining SEC filings, court filings, and other public documents to ascertain whether 8. This is a point of jurisdiction. State law statutes allow for suit in a corporation’s jurisdiction of organization. See, e.g. , DEL. CODE ANN. tit. 10, § 3111 (2013). Meanwhile, the location of a company’s headquarters is a significant enough tie to sustain jurisdiction in all states. If a company has business outside these two jurisdictions, a suit there is also possible, depending upon the state’s jurisdictional statute. Int’l Shoe Co. v. Washington, 326 U.S. 310, 319–20 (1945). 9. See Robert B. Thompson & Randall S. Thomas, The New Look of Shareholder Litigation: Acquisition-Oriented Class Actions , 57 VAND. L. REV. 133, 144–45 (2004); see also ROBERT M. DAINES & OLGA KOUMRIAN, CORNERSTONE RESEARCH, RECENT DEVELOPMENTS IN SHAREHOLDER LITIGATION INVOLVING MERGERS AND ACQUISITIONS: MARCH 2012 UPDATE 2, 6–8 (2012), available at http://www. cornerstone.com/getattachment/03dcde90-ce88-4452-a58a-b9efcc32ed71/Recent-Developments-in -Shareholder-Litigation-Invo.aspx. 10. We thank Joseph A. Grundfest, W.A. Franke Professor of Law and Business, Stanford University School of Law, for bringing this notion to our attention. 11. See Thompson & Thomas, supra note 9, at 135. 12. See Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 180 (Del. 1986) (holding that in the event of a change of control or break-up of the company enhanced scrutiny applied); Weinberger v. UOP, Inc., 457 A.2d 701, 711–15 (Del. 1983) (holding that in freeze-out mergers the...