In a study published in the Journal of Corporation Law, law school Professors Badawi and Webber examined, over a five-year period, takeover target share price changes in reaction to the perceived quality of the law firm(s) filing litigation challenging, on behalf of institutional shareholders, the fairness of the announced proposed merger or acquisition. The professors grouped the plaintiff firms into “high quality” and “low quality”, based on a number of critieria, including value of settlements recovered and whether any of the firms were openly criticized by the Delaware Chancery judges as being, well, worthless leeches, basically.
The study’s authors conclude that when the “high quality” firms file (which they often do on the same day the merger or acquisition is announced), shareholders win. When the “lower quality” firms file (which typically wait a couple of days after the announcement), shareholders lose. Upon filing of the case, our results suggest that there is a relative increase in target stock price when higher quality law firms are involved in the litigation. Alternatively, when no top quality law firms are present, but a lower quality firm is, the relative value of the target’s shares appears to decrease. We attribute these results to the market’s recognition of the possibility that the higher quality firms will be able to obtain a significant settlement for shareholders. Lesser quality firms may be less able to win such settlements, which would explain the negative effect on target share price when they, but not top firms, are litigating cases. The effect of these firms on target share price may be limited to the threat that they can hold up a deal. Alternatively, the negative effect of filing by a low quality law firm may reflect the market’s “disappointment” that a deal with material flaws will not be targeted by a top law firm.
Incidentally, the top three plaintiff firms earned an average of $6.1 million in fees per case.
The bottom three firms? $670,000 in average fees per case.
Regardless of how the top firms got there, it doesn’t seem like they are going to be displaced anytime soon. A nice gig if you can get it.