Steven Davidoff Solomon

A Great Game: The Dynamics of State Competition and Litigation

We provide a multi-dimensional picture of jurisdictional competition for corporate litigation by examining merger litigation in a hand-collected sample of 1,117 takeovers from 2005-2011. We find that 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.

Paradigm Shift: Federal Securities Regulation in the New Millennium

In May 2007, Oaktree Capital Management LLC, a U.S.-based hedge fund adviser with over forty billion dollars in assets under management, sold approximately fourteen percent of its equity for more than

Who are the Top Law Firms?Assessing the Value of Plaintiffs’ Law Firms in Merger Litigation

800 million in a widespread offering made to a number of prospective purchasers. This equity offering was not made on the New York Stock Exchange or Nasdaq. Instead, Oaktrees initial offering was made on the U.S. private market. The company thereafter listed its equity securities on Goldman Sachs & Co.s non-public market, the GS Tradable Unregistered Equity OTC Market. This offering is emblematic of a paradigm shift occurring in the capital markets: the market for capital is increasingly competitive and global, viable public and private markets are proliferating world-wide, domestic investing patterns are changing as intermediary investing and deretailization occur, and financial innovation is quickening. The result is an on-going, perhaps revolutionary, transformation in the scope and structure of the global and domestic capital markets. This essay is about this paradigm shift, its implications for the SEC regulatory process and the future of federal securities regulation. It was prepared for and presented at the 2008 meeting of the AALS securities regulation section.

Confronting the Peppercorn Settlement in Merger Litigation: An Empirical Analysis and a Proposal for Reform

Using a hand-collected sample of 1,739 class actions that challenge the fairness of M&A transactions from the period 2003 through 2012, we examine the effectiveness of plaintiffs’ law firms. From out of the 336 law firms in our sample, we determine the top law firms based on their popularity with informed plaintiffs as well as their proven ability to obtain large attorneys’ fees awards. We find that the presence of a top plaintiffs’ law firm is significantly and positively associated with a higher probability of lawsuit success. These results hold even after instrumenting for unobserved case quality, given that top law firms likely can obtain better cases with higher chances of success. This success appears to stem from the fact that top plaintiffs’ law firms are significantly more active in prosecuting cases than other plaintiffs’ law firms: they file more documents in the cases they litigate and they are more likely to bring injunction motions to enjoin a transaction. Defendants are also less likely to file a motion to dismiss cases filed by top plaintiffs’ law firms. Our results inform the debate over shareholder litigation as well as provide courts guidance for selecting lead counsel in shareholder class action litigation. ** Please address correspondence to CNV Krishnan at cnk2@case.edu. CNV Krishnan is at Weatherhead School of Management, Case Western Reserve University; Steven Davidoff Solomon is at the University of California Berkeley, School of Law; and Randall S. Thomas is the John S. Beasley II Professor of Law and Business at Vanderbilt University Law School. The authors thank the editor, Max Schanzenbach, two anonymous reviewers, the participants in the University of California at Berkeley School of Law Faculty Workshop, the members of the University of San Diego Law School’s Innovation and Financial Regulation Seminar, The Law and Business Workshop at Vanderbilt Law School, Chief Justice Leo E. Strine, Jr. of the Delaware Supreme Court, Professors Robert P. Bartlett, III, Paul Edelman and Jonathan Karpoff and several plaintiffs’ lawyers for their comments and suggestions. The authors also thank John Dotson, Scott Prince, Mary Prince and the Vanderbilt Law School librarians for their research assistance.

Broken Promises: The Role of Reputation in Private Equity Contracting and Strategic Default

Shareholder litigation challenging corporate mergers is ubiquitous, with the likelihood of a shareholder suit exceeding 90%. The value of this litigation, however, is questionable. The vast majority of merger cases settle for nothing more than supplemental disclosures in the merger proxy statement. The attorneys that bring these lawsuits are compensated for their efforts with a court-awarded fee. This leads critics to charge that merger litigation benefits only the lawyers who bring the claims, not the shareholders they represent. In response, defenders of merger litigation argue that the lawsuits serve a useful oversight function and that the improved disclosures that result are beneficial to shareholders.This Article offers a new approach to assessing the value of these claims by empirically testing the relationship between merger litigation and shareholder voting on the merger. If the supplemental disclosures produced by the settlement of merger litigation are valuable, they should affect shareholder voting behavior. Specifically, supplemental disclosures that are, in effect, “compelled” by settlement should produce new and unfavorable information about the merger and lead to a lower percentage of shares voted in favor of it. Applying this hypothesis to a hand-collected sample of 453 large public company mergers from 2005-2012, we find no such effect. We find no significant evidence that disclosure-only settlements affect shareholder voting.These findings warrant a reconsideration of Delaware merger law. Specifically, under current law, supplemental disclosures are viewed by courts as providing a substantial benefit to the shareholder class. In turn, this substantial benefit entitles the plaintiffs’ lawyers to an award of attorneys’ fees. Our evidence suggests that this legal analysis is misguided and that supplemental disclosures do not in fact constitute a substantial benefit. As a result, and in light of the substantial costs generated by public company merger litigation, we argue that courts should reject disclosure settlements as a basis for attorney fee awards.Our approach responds to critiques of merger litigation as excessive and frivolous by reducing the incentive for plaintiffs’ lawyers to bring weak cases, but it would have an additional benefit. Current practice drags state court judges into the task of indirectly promulgating disclosure standards in connection with the approval of fee awards. We argue, instead, for a more efficient specialization between state and federal courts in the regulation of mergers: public company merger disclosure should be policed by the federal securities laws while state corporate law focuses on substantive fairness.

An Empirical Study of Special Litigation Committees: Evidence of Management Bias and the Effect of Legal Standards

This paper examines reputation and contract design in private equity acquisitions. We use a novel dataset of both completed and terminated private equity buyouts from 2004 through 2010. We find that private equity firms and targets rely on reputation to fill intentional contractual gaps. During the financial crisis private equity firms complete uneconomic, pre-agreed takeovers up to the point when estimated buyout losses rise to at least 7% of sponsors’ fund sizes, or

The Dealmaking State: Executive Power in the Trump Administration

200 to

Tenure Voting and the U.S. Public Company

400 million in nominal values. Target firms are willing to engage with defaulting private equity firms in future transactions but they penalize these firms by demanding significantly larger contract nonperformance penalties. We conclude that both reputation and explicit contracting can play important and interrelated roles in private equity and complex business relationships generally.To explore the relation between reputation and financial contracting, this paper examines the contracting structure in a novel dataset of 227 private equity buyouts of U.S. targets from 2004-2010. We note several provisions which allowed bidders to terminate contracts during the 2007-2008 financial crisis and show how contract structure is related to ex post litigation settlements. Consistent with economic theory, private equity firms were more likely to engage in contract nonperformance when default penalties were lower. Using details of target valuation changes and contract default penalties, we estimate the gains from backing out of these contracts. These gains approximate the values that bidders place on their reputations, which range from 5% to 9% of the sponsors’ fund sizes, or

Mergers and acquisitions: a cyclical and legal phenomenon

180 million to

Intermediation in Private Equity: The Role of Placement Agents

2.5 billion in nominal dollars. We also document the reputational damage resulting from this wave of terminations and find that default penalties are about 115% higher in 2009-2010 than during the pre-financial crisis period. Ultimately, the results demonstrate that in even the most complex transactions subject to financial contracting, reputation and collective group behavior play an essential role in the negotiating process.