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.
In the early 20th century, the limited liability afforded by the corporate form was in its nascency. Lawyers consequently resorted to contract language to shield shareholders from liability for the corporation’s debts, using the so-called “no recourse against others” clause.
Today, most lawyers take corporate liability protection for granted, and probably assume that such a clause is unnecessary. Yet, trust in the supposed impenetrability of the corporate veil could be misplaced.
According to one appellate survey: almost half of all veil-piercing claims in the US are successful; in New York and Texas, about 20 percent of all reported decisions involving parent-subsidiary piercing claims have been successful; such claims have increased significantly in recent years; and courts are three times more likely to pierce the veil in a contract case than in a tort case.
In fact, as recently as May of this year, the Delaware Court of Chancery, in Manichaean Capital, LLC v. Exela Technologies, Inc. (May 25, 2021), held that in appropriate circumstances, reverse veil piercing (to go after subsidiaries of a parent debtor) was an available remedy for a judgment creditor who could not collect directly from the judgment debtor.
Counsel may want to consider language, inspired by early 1900s bond indentures, that purports to eliminate recourse against non-parties—especially for use in private M&A-related or investment/lending agreements, JVs, and situations in which it otherwise just makes sense to be solicitous of non-parties.
No Recourse against Non-Parties. Each party waives and releases all claims, obligations, and liabilities, whether under law, equity, contract, tort or statute, that arise under or relate to this Agreement or its negotiation, performance or breach, against any person or entity that is not a signatory to this Agreement, including any director, officer, employee, member, shareholder, affiliate, or agent of, or lender to, a signatory to this Agreement or its affiliates. Each party relinquishes any claim in the nature of disregarding the corporate entity or piercing the corporate veil.
The intended audience for this post is licensed and practicing lawyers, not laypersons seeking legal advice for their situation. If you are not a lawyer, hire one before using or relying on any information contained here. This post is: (1) informational only and not intended as advertising or as solicitation for legal services, (2) not intended to render legal advice to you, and (3) not a substitute for obtaining legal advice from a qualified attorney to assess your exact situation. The information here is subject to change and may not be applicable or correct in your jurisdiction. The views and opinions expressed here are Sean’s alone and do not necessarily represent the positions of Sean’s present or former employers, law firms, or clients.
