Corporate Governance

Of Pilgrims and Puritans and the Role of Delaware Courts: In re Revlon (The Role of the Courts)

By J Robert Brown Jr.

There can be little doubt that in the securities or derivative suit area counsel for shareholders/investors can have an incentive to settle early and pocket fees (we offer no view on whether that was something that occurred here).  But we would like to point out that this is a problem that has many accomplices, including Delaware.

For one thing, as VC Laster points out, no settlement can be approved (including the fee requests) without the consent of the court.

• But this problem of "selling out" by "pilgrims" is a well known risk, protected against, to some extent, by the judicial process that requires notice, hearing, and judicial approval. This process is certainly not perfect, but the significant point is that the risk of selling out plaintiffs is a function of the way we have designed class action suits and exists in federal courts as well as state courts. Thus the potential for sell-outs is the reason the rendering court will have a hearing and will make a judicial determination of the fairness and adequacy of the settlement.

To the extent there is concern with a common pattern of collaboration among lawyers on both sides of a case, it is because the Delaware courts have not been particularly rigorous in policing the relationship. 

For another, he notes that law firms handle a portfolio of cases and "cannot expect to win every case."  In fact, in Delaware, plaintiffs can expect to lose most of them and it is not because of their lack of legal acument or the acument of defense counsel.  In Delaware, through the use of procedural hurdles (the demand requirement in derivative suits, the credible evidence in actions for the inspection of records, the subjective materiality standard in the case of independent directors), the Delaware courts dismiss plenty of potentially meritorious cases. 

Finally, the issue of plaintiffs filing quickly, something the opinion in Revlon dwells upon at length, was common in securities class action lawsuits until the adoption of the PSLRA.  The benefits of speed are gone and the shareholder with the largest loss becomes the presumptive plaintiff, capable of exercising greater control over the progress of litigation.  In the securities area, this has resulted in fewer cases but higher in average settlements. 

If Delaware wants to avoid the rapid filing of complaints or encourage complaints to contain greater thought and detail (it is not without irony that VC Laster criticizes the complaints in this case for their brevity when its more common for complaints to be branded as prolix), then adopt the model used in the PSLRA.  Of course, the increase in settlement amounts in the securities context suggests that plaintiffs bring better cases as a result.  This may not be a reform that Delaware really wants to implement.  

Primary materials are, as usual, posted on the DU Corporate Governance website.

Full post as published by The Race to the Bottom on May 05, 2010 (boomark / email).