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Finding cures for the corporate class-action lawsuit epidemic

By   /   Friday, June 8th, 2012  /   Comments Off on Finding cures for the corporate class-action lawsuit epidemic

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The plague of class-action lawsuits afflicting corporate America is spreading across the Tri-Counties.

A stock-price drop. Bam. A merger announcement. Bam. Trying to take a company private. Bam.

For journalists, the announcement of a class-action lawsuit typically comes in the form of a press release that gets wide dissemination on BusinessWire and on Yahoo Finance. It is a tempting target for a story, especially in a competitive news environment where there’s a lot of pressure to produce follow-up stories on the second or third day after a big deal is announced.

But we also need to ask, what’s going on? An article entitled “Shark Attack” in the June 2 edition of The Economist unearths disturbing statistics about the proliferation of class-action suits against companies involved in transactions. It cites a study by researchers at Stanford University and Cornerstone, a consulting firm, which concludes that  96 percent of merger announcements worth more than $500 million are the subject of class-action filings, up from 39 percent in 2005.

Not surprisingly, the magazine reports that the big beneficiaries are law firms, who benefit to the tune of about $1.2 million per lawsuit filed, mainly from companies that would prefer to toss a bone to the lawyers rather than undergo more expensive litigation. The only companies that are truly motivated to fight rather than settle are private-equity firms that buy lots of companies, the article says.

Judges complain that such litigation is taking way too much time. Those The Economist talked to expressed doubt that more than 90 percent of deals involve a breach of fiduciary duty. Most of the time, except for legal expenses, the “damages” consist of some perfunctory additional disclosures by the defendant corporation.

In many such suits, plaintiffs don’t get a cent more for their shares but plaintiff attorneys get rich. That’s why the Delaware Chancery Court, a key venue for the suits, is threatening to slash fees to firms that rely heavily on boilerplate language to make filings immediately after a deal is announced.

Looking at one recent example, it’s hard to imagine how plaintiffs will be successful in getting more money for shareholders out of Santa Barbara-based Pacific Capital Bancorp, which is in the process of being sold for $1.5 billion to Union Bank.

Union’s offer was a huge premium over the company’s selling price on the day the merger was announced and it has the overwhelming support of Ford Financial Fund, the controlling shareholder of Pacific Capital, parent of Santa Barbara Bank & Trust.

Meanwhile, there are signs that a tentative effort to mount a class action suit against Goleta-based Deckers Outdoor Corp., the parent of Ugg Australia, over the recent sharp decline in its stock price are faltering. With a deadline looming,  attorneys have not been able to attract a lead plaintiff to file a case. They continue to pump out press releases hoping to attract enough attention to find qualified shareholders, but so far without success.

When corporations break the law or commit fraud, they should be held accountable. But dealmaking lies at the heart and soul of the free-enterprise system. The First Amendment protects class action lawyers’ rights to publicize their fishing expeditions for plaintiffs. The best answer is not to raise the evidence bar for filings or to squelch the flow of information.

Perhaps a variant to the “loser pays” movement that was part of the tort reform enacted in California and other states is in order. One way would be to cap fee recoveries for firms that file large numbers of cut-and-paste lawsuits as a knee-jerk reaction to transactions or share price drops — unless that particular case results in an actual cash recovery for shareholders.

Taking away the class action firms’ easy access to $1 million fees would go a long way to curing the class action suit epidemic.

• Contact Editor Henry Dubroff at [email protected]

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