The decisions of the corporate special litigation committees: an empirical investigation

Indiana Law Journal

Volumn 84, Issue 4, 2009, Pages 1309-1336

  Minor, Myers ^a  

^a BROOKLYN LAW SCHOOL   (United States)

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EID: 70349100780     PISSN: 00196665     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (143)

1. WILLIAM A. KLEIN & JOHN C. COFFEE, JR., BUSINESS ORGANIZATION AND FINANCE: LEGAL AND ECONOMIC PRINCIPLES 209 (9th ed. 2004) ("[S]pecial committees almost invariably decide that the derivative action should be dismissed."); see abo infra notes 18-19.
2. See infra notes 18-19.
3. Bryant G. Garth, Ilene H. Nagel & Sheldon J. Plager, Empirical Research and the Shareholder Derivative Suit: Toward a Better-Informed Debate, 48 LAW & CONTEMP. PROBS. 137, 153 (1985) ("So much of the current literature and case law revolves around this relatively new development that it is important to develop research strategies to test some of the positions that have been taken.").
4. Id. at 155 n.128.
5. See infra notes 28-29 and accompanying text As Professor and former Chancellor William T. Allen once noted, deciding which view is correct-whether disinterested directors are fit to pass judgment on their colleagues-requires an understanding of "how committees of outside directors have in fact tended to art in various settings."
6. William T. Allen, Independent Directors in MBO Transactions: Are They Fact or Fantasy?, 45 Bus. LAW. 2055, 2058-2059 (1990) (emphasis in original).
7. E.g., LUCIAN BEBCHUK & JESSE FRIED, PAY WITHOUT PERFORMANCE: THE UNFULFILLED PROMISE OF EXECUTIVE COMPENSATION 4-5 (2004) ("[Executives have had substantial influence over their own pay. Compensation arrangements have often deviated from arm'slength contracting because directors have been influenced by management, sympathetic to executives, insufficiently motivated to bargain over compensation, or simply ineffectual in overseeing compensation.").
8. See, e.g., STEPHEN M. BAINBRIDGE, CORPORATION LAW AND ECONOMICS 227 (2002) ("Most of the learning on ⋯ structural bias ⋯ arises out of the use of special litigation committees to terminate shareholder derivative actions against officers or directors.").
9. Id. at 228.
10. Kenneth B. Davis, Jr., Structural Bias, Special Litigation Committees, and the Vagaries of Director Independence, 90 IOWA L. REV. 1305, 1307 (2005) ("[TJhe law and many of the procedures that developed in the SLC context have direct implications for the larger corporate governance reform now underway.").
11. E.g, DEL. CODE ANN. tit. 8, § 141(a) (2001) ("The business and affaire of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation.");
12. see also Auerbach v. Bennett, 393 N.E.2d 994, 1000 (N.Y. 1979) ("Derivative claims against corporate directors belong to the corporation itself.");
13. Michael P. Dooley & E. Norman Veasey, 7Ae Role of the Board in Derivative Litigation: Delaware Law and the Current ALI Proposals Compared, 44 Bus. LAW. 503, 504 (1989) ("In derivative actions the claims belong to the corporation, not to the complaining stockholder.").
14. See generally Levine v. Smith, No.8833, 1987 Del. Ch. LEXIS 524, at *6 (Del. Ch. Dec. 22, 1987) (noting that the shareholder plaintiff assumes "the legal managerial power to maintain a derivative action to enforce the corporation's claim");
15. DEBORAH A. DEMOTT, SHAREHOLDER DERIVATIVE ACTIONS: LAW AND PRACTICE (2003 & Supp. 2009).
16. Practitioners emphasize the importance of selecting persons who are disinterested and independent. SLC members are often new appointees to the board or are sometimes outside directors already on the board.
17. See abo In re Oracle Corp. Derivative Litig., 824 A.2d 917 (Del. Ch. 2003) (finding a lack of independence based on mutual associations with Stanford University);
18. see generally RALPH C. FERRARA, KEVIN T. ABKOFF & LAURA LEEDY GANSLER, SHAREHOLDER DERIVATIVE LITIGATION: BESIEGING THE BOARD § 8.10 (Supp. 2008);
19. ROGER J. MAGNUSON, SHAREHOLDER LITIGATION §§ 9:24-25 (Supp. 2007);
20. JOSEPH M. MCLAUGHLIN, MCLAUGHLIN ON CLASS ACTIONS § 9:16 (2006);
21. Robert K. Payson, Michael D. Goldman & Gregory A. Inskip, After Maldonado - The Role of the Special Litigation Committee in the Investigation and Dismissal of Derivative Suits, 37 BUS. LAW. 1199, 1202-03 (1982).
22. See FERRARA ET AL., supra note 12, § 8.10;
23. MAGNUSON, supra note 12, §§ 9:24-25;
24. MCLAUGHLIN, supra note 12, § 9:16.
25. - 2 MCLAUGHLIN, supra note 12, § 9:16 (noting that SLCs ordinarily issue a report with "the conclusion of the SLC with respect to the claim and a recommended course of action, i.e., whether the claim should be prosecuted, dismissed or settled, subject to judicial approval") (emphasis in original).
26. On pursuit, see R. FRANKLIN BALOTTI & JESSE A. FINKELSTEIN, THE DELAWARE LAW OF CORPORATIONS AND BUSINESS ORGANIZATIONS § 13.17 (2007) ("It appears that if a special litigation committee determines that the best interests of the corporation would be served by further litigation of derivative claims, the corporation may either take control of the litigation itself or allow the stockholder-plaintiff to pursue the claims on behalf of the corporation."). On settlement,
27. see Carlton Invs. v. TLC Beatrice Int'l Holdings, Inc., No.13950, 1997 WL 305829 (Del. Ch. May 30, 1997) (approving an SLC-negotiated settlement against the wishes of the shareholder-plaintiff).
28. Henry Hansmann & Reimer Kraakman, Agency Problems and Legal Strategies, in THE ANATOMY OF CORPORATE LAW 21, 27 (Reinier Kraakman, Paul Davies, Henry Hansmann, Gerard Hertig, Klaus Hopt, Hideki Kanda & Edward Rock eds., 2004).
29. See Auerbach v. Bennett, 393 N.E. 2d 994, 1001 (N.Y. 1979) (fitting SLC practice into "the general policy that when individual members of a board of directors prove to have personal interests which may conflict with the interests of the corporation, such interested directors must be excluded while the remaining members of the board proceed to consideration and action.");
30. see abo DEL. CODE ANN. tit. 8, § 144(aXl) (2001) (insulating interested transactions from challenge so long as a majority of disinterested directors approves the transaction);
31. KLEIN SC COFFEE, supra note 1, at 161 ("A typical statute creates a 'safe harbor' rale under which a director's conflict does not render the transaction voidable if the transaction was⋯ approved by disinterested directors after full disclosure as to the conflict⋯").
32. But see infra notes 29-34 (describing states that apply more scrutiny than business judgment or do not recognize SLC authority at all).
33. E.g., ROBERT CHARLES CLARK, CORPORATE LAW § 15.2.3 ( 1986) (describing that "after a suitable display of investigative activity and collective deliberation, [a typical SLC] would produce a report that concluded, unsurprisingly, that the committee thought it was in the corporation's 'best interest' not to proceed with the lawsuit");
34. FRANKLIN A. GEVURTZ, CORPORATION LAW 412 (2000) ("Special litigation committees, almost without exception, have concluded that derivative suits which the committees looked into were not in the corporation's best interest");
35. KLEIN & COFFEE, supra note 1, at 209 ("special committees almost invariably decide that the derivative action should be dismissed");
36. - 9 Louis Loss & JOEL SELIGMAN, SECURITIES REGULATION § 11(C)(4)(b) n.340 (3d ed. 2004) ("Special litigation committees almost invariably have recommended that derivative actions should not be continued.");
37. JONATHAN R. MACEY, CORPORATE GOVERNANCE: PROMISES KEPT, PROMISES BROKEN 65-66 (2008) ("SLCs uniformly recommend that derivative lawsuits brought by outside shareholders be dismissed.");
38. Daniel J. Morrissey, The Path of Corporate Law: Of Options Backdating, Derivative Suits, and the Business Judgment Rule, 86 OR. L. REV. 973, 1003 (2007) (an SLC "almost always recommend[s] dismissal");
39. Charles W. Murdock, Corporate Governance-The Role of Special Litigation Committees, 68 WASH. L. REV. 79, 84 (1993) ("[i]nvariably the committee moves to dismiss the litigation");
40. Robert B. Thompson & Randall S. Thomas, The Public and Private Faces of Derivative Lawsuits, 57 VAND. L. REV. 1747, 1791 n.l47(2004) (noting that "the limited data that has been collected on [SLC behavior] supports the view that the appointment of a special litigation committee almost always leads to dismissal of the case").
41. E.g., FERRARA ET AL., supra note 12, § 8.06 ("[I]t is well-established that special litigation committees have sided with the defendants in an overwhelming number of cases in which they have been employed.");
42. MAGNUSON, supra note12, § 9:23 ("If the'disinterested' special litigation committee is not impressed by the plaintiff's lawsuit (and they never are), the lawsuit is over.⋯Special litigation committees always recommend dismissal." (citations omitted));
43. MCLAUGHLIN, supra note 12, § 9:16 ("The experience in the great majority of cases has been that the SLC issues a report recommending that the demanded litigation is not in the best interests of the corporation.").
44. James D. Cox, Searching for the Corporation's Voice in Derivative Suit Litigation: A Critique of Zapata and the ALI Project, 1982 DUKE L.J. 959.
45. Id. at 963 nn.13 & 14 ("[Although there have been more than a score of special litigation committee cases to date, in all but one the committee concluded that the suit in question was not in the corporation's best interest").
46. E.g., Richard C. Brown, Shareholder Derivative Litigation and the Special Litigation Committee, A3 U. PITT. L. REV. 601, 620-21 (1982) (collecting reported cases in support of the conclusion that "[s]pecial litigation committees, after completing their investigations, have so far always determined that the derivative action was not in the best interests of the corporation and have voted to terminate the suit");
47. George W. Dent, Jr., The Power of Directors to Terminate Shareholder Litigation: The Death of the Derivative Suit?, 75 Nw. U. L. REV. 96, 109 & n.70 (1980) (collecting reported cases on demand in support ofthe conclusion that in the SLC context "almost invariably, the directors charged with the decision decide to oppose the suit").
48. Thompson & Thomas, supra note 18, at 1791 n.147 (noting private correspondence from Professor Cox to the authors).
49. AM. LAW INST., PRINCIPLES OF CORPORATE GOVERNANCE: ANALYSIS AND RECOMMENDATIONS 161 (Tentative Draft No. 8, 1988) ("Efforts to calculate the outcome of litigation committee determinations have reported that the committee, once formed, has almost invariably recommended dismissal of the action against all defendants." (citing Cox supra note 20, at 959)). Many commentators limit their claims about SLC behavior to what the available evidence shows.
50. BAINBRIDGE, supra note 7, at 399-400 ("The legitimacy of [the Delaware Supreme Court's 'there but for the grace of God go I' concern] is supported by the fact that in only one of the first 20 reported SLC decisions did the committee determine that the suit should proceed.");
51. ROBERT W. HAMILTON & JONATHAN R. MACEY, CASES AND MATERIALS ON CORPORATIONS 734 (10th ed. 2007) (suggesting that in "virtually every case" SLCs decide only not to pursue);
52. ARTHUR R. PINTO & DOUGLAS M. BRANSON, UNDERSTANDING CORPORATE LAW 465 (2d ed. 2004) (noting that "no SLC has ever recommended that derivative litigation continue against sitting officers, as opposed to former directors or senior executive officers.");
53. Julian Velasco, Structural Bias and the Need for Substantive Review, 82 WASH. U. L.Q. 821, 857 (2004) (noting that disinterested directors "naturally are averse to derivative litigation" and "consistently reject demands and otherwise seek dismissal of derivative actions").
54. GEVURTZ, supra note 18, at 412 n. 106 (noting that "no anecdotal reports of favorable committee recommendations regarding a derivative suit and no reports of any case in which the corporation took over and prosecuted a suit against the company's directors based upon a committee's decision").
55. Id. (noting that the only "exceptions to the negative evaluation of derivative suits by special litigation committees occurred in a couple of cases in which the committees recommended dismissing the actions against the corporations' directors, but either settling or continuing the actions against several lower level present or former corporate officials." (citing Joy v. North, 692 F.2d 880 (2d Cir. 1982);
56. In re Cont'l 111. Sec. Litig., 572 F. Supp. 928 (N.D. 111. 1983)).
57. Professor Cox's treatise (with Professor Thomas Lee Hazen) says that "committees have generally concluded that continuation of the suit would not promote the best interests of the corporation. Occasionally, a committee will propose a settlement of the action to the derivative suit court." JAMES D. Cox & THOMAS LEE HAZEN, COX & HAZEN ON CORPORATIONS 939 (2d ed. 2003).
58. HAMILTON & MACEY, supra note 24, at 734 (suggesting that SLC decisions can "be explained on the basis that virtually all derivative litigation filed today is without merit" (citations omitted)).
59. See Davis, supra note 9, at 1309;
60. Velasco, supra note 24, at 824.
61. See In re Oracle Corp. Derivative Litig., 824 A.2d 917, 938 (Del. Ch. 2003) ("[Corporate directors are generally the sort of people deeply enmeshed in social institutions. Such institutions have norms, expectations that, explicitly and implicitly, influence and channel the behavior of those who participate in their operation."). Many state courts have not yet considered the authority of corporate SLCs.
62. Zapata Corp. v. Maldonado, 430 A.2d 779, 787 (Del. 1981).
63. Id. at 788-789
64. Miller v. Register & Tribune Syndicate, Inc., 336 N.W.2d 709, 718 (Iowa 1983) (seeking to "prevent the potential for structural bias in some cases by effectively limiting the powers of such directors in all cases").
65. Auerbach v. Bennett, 393 N.E.2d 994, 1000-1002 (N.Y. 1979).
66. See IND. CODE § 23-1-32-4(c) (2005);
67. Desaigoudar v. Meyercord, 133 Cal. Rptr. 2d 408, 418-19 (Cal. Ct App. 2003);
68. Hirsch v. Jones Intercable, Inc., 984 P.2d 629, 637-38 (Colo. 1999);
69. Black v. NuAire, Inc., 426 N.W.2d 203, 209-210 (Minn. Ct App. 1988).
70. The data collected here thus include only organizations that comply with SEC disclosure requirements. Generally, this means publicly traded companies, but as Robert Bartlett has shown, some organizations with no publicly owned equity nevertheless continue to comply with SEC disclosure obligations. Robert P. Bartlett, III, Going Private but Staying Public: Reexamining the Effect of Sarbanes-Oxley on Firms ' Going-Private Decbions, 76 U. CHI. L. REV. (forthcoming 2009).
71. The EDGAR database is the SECs repository for electronic company filings.
72. See U.S. Sec. and Exch. Comm.: Filings & Forms, http://www.sec.gov/ edgar.shtml. Some filings during that period describe SLC behavior from before that period and after it, and that data has been included in this study.
73. For information on the ambiguity of the disclosure requirements, see Appendix.
74. See Appendix for more on the calculation of the eighty-four percent figure.
75. An organization may not be publicly owned but nevertheless comply with the SEC's disclosure obligations because the organization has a high-yield note indenture that requires continued disclosure or because the equity holders may value the firm's commitment to compliance with disclosure obligations. Bartlett, supra note 35.
76. All domestic registrants became subject to the electronic filing requirements in May 1996. Charles N. Chamas & D. Craig Nordlund, Introduction to Operational EDGAR: An Outline for Electronic Filing with the SEC, in PREPARATION OF ANNUAL DISCLOSURE DOCUMENTS 1997, at 281, 286 (PLI Corp. Law & Practice Course Handbook Series No. 969, 1997) ("This phase-in was completed by May 6, 1996, and all registrants should currently be using EDGAR for their filings."). SLC decisions in the data from the periods 1993-94 and 2005-06 do not represent all SLC activity then because those decisions are included here only if they were mentioned in filings between 1995 and 2004. Within the 1997-2004 period, the data should include all SLC decisions. Although the number of SLC decisions increased threefold from 2001 to 2002, it is impossible to say whether this represents a change up or down in the number of litigation committee decisions relative to the number of derivative filings.
77. Thompson & Thomas, supra note 18.
78. One of the SLCs in their study recommended dismissal, and this SLC is in this data set Id. at 1781 n.121
79. (citing Kindt v. Lund, No. 17751-NC, 2003 Del. Ch. LEXIS 62 (Del. Ch. May 30, 2003) (granting NuSkin Enterprises's motion to dismiss based on report and recommendation of SLC)).
80. The other SLC was formed by a company not in the EDGAR database and is not in this data; its appointment "led to a settlement." Id. at 1781.
81. In this study, more often than not, when an SLC was created to manage allegations against a Delaware corporation, no complaint was filed in Delaware. In only twenty out of fortythree such instances was a complaint, even a nonlead complaint, filed in Delaware. One important caveat here is that disclosure documents might not always list all jurisdictions in which a claim has been filed.
82. For the other nine SLCs, a decision could not be determined because the filer entered bankruptcy and took care of its derivative claims in reorganization; it ceased filing for unknown reasons; it was acquired; etc. There were no evident unique characteristics of these nine SLCs.
83. See Joy v. North, 692 F.2d 880 (2d Cir. 1982) (denying SLC motion to dismiss against twenty-three defendants after SLC agreed to settle with seven other defendants).
84. Dividing the SLCs into publicly traded and nonpublicly traded organizations does not make much difference. The decisions of SLCs by category and by ownership are as follows: Footnote Table 1. SLC Decisions by Public or Nonpublic Equity (table presenting) Two entities could not be classified as publicly traded or not.
85. See supra note 39 for an explanation of why firms with no publicly traded equity appear in the data. SLCs in publicly traded firms and non-publicly traded firms decided to dismiss claims at roughly the same rate. When not dismissing claims, publicly traded firms settled more regularly than did non-publicly traded firms. These differences are not statistically significant (p = 0.464).
86. Professor Deborah DeMott suggested just this in a recent update to her treatise on derivative litigation. DEMOTT, supra note 11, § 5:18 ("More recent examples suggest that litigation committees may recommend that claims be pursued following either changes in control of the corporation or abuses at startling levels of excess and abuse.").
87. See In re Oracle Corp. Derivative Litig., 824 A.2d 917, 947 (Del. Ch. 2003) (denying SLCs motion to terminate proceedings because connections between defendants and SLC members "generate a reasonable doubt about the SLCs impartiality");
88. Biondi v. Scrushy, 820 A.2d 1148, 1166 (Del. Ch. 2003) (denying SLCs motion to stay proceedings because the conduct of the committee did not indicate it was discharging its responsibilities "with integrity and objectivity").
89. For commentary on the importance of the cases, see John C. Coffee, Jr., Gatekeeper Failure and Reform: The Challenge of Fashioning Relevant Reforms, 84 B.U. L. REV. 301, 341 (2004) ("[T]he holdings and dicta in these recent cases have upgraded the level of care and attention that courts are expecting all corporate fiduciaries to exercise. In short, all the judicial straws in the wind point towards a higher risk of liability⋯.");
90. Davis, supra note 9, at 1307 ("[T]he recent Oracle decision in Delaware suggests that the courts may be taking a more stringent approach to the SLC in the post-Enron environment").
91. One prominent Delaware practitioner noted that, "while the independent/not independent line appears to have moved slightly in the latter direction, one cannot conclude that Scrushy and Oracle represent a dramatic change in Delaware's approach to issues of director independence." A. Gilchrist Sparks, III, Andrew H. Lippstone & Julie R. Windhorn, Trends in the Delaware Corporate Law: Director Liability and Indemnification, in CONTESTS FOR CORPORATE CONTROL: CURRENT OFFENSIVE AND DEFENSIVE STRATEGIES IN M&A TRANSACTIONS 2004, at 331, 343 (PLI Corp. Law & Practice Course Handbook Series No. 1405, 2004).
92. Reported cases are rulings issued by courts that resolve some issue of law in dispute and generally involve a written opinion explaining the court's reasoning.
93. E.g., George L. Priest & Benjamin Klein, The Selection of Disputes for Litigation, 13 J. LEGAL STUD. 1, 2(1984) ("It is well known, however, that only a very small fraction of disputes comes to trial and an even smaller fraction is appealed. In a study of insurance company claims files, H. Laurence Ross reports that, of his sample, only 4.2 percent of claims ultimately reached trial and 0.2 percent of claims were appealed.⋯ It is very difficult to infer specific characteristics from observations of 0.2 percent or less of a population, especially where there is no evidence that the observations (the disputes selected for appeal) were selected randomly.").
94. ROBERTA ROMANO, FOUNDATIONS OF CORPORATE LAW 81 (1993).
95. See Payson et al., supra note 12, at 1207 (noting that if an SLC pursues claims "the individual defendants would probably be in a worse position than if the committee had never been established at all"). An SLC recommendation to pursue claims has produced reported decisions.
96. See Allied Ready Mix Co. ex. rel. Mattingly v. Allen, 994 S.W.2d 4 (Ky. Ct App. 1998).
97. But see Joy v. North, 692 F.2d 880, 884 (2d Cir. 1982) (stating that SLC recommended settlement with certain defendants);
98. In re Cendant Corp. Derivative Action Litig., 232 F. Supp. 2d 327, 335-36 (D.N.J. 2002) (same);
99. Alford v. Shaw, 358 S.E.2d 323, 324-325 (N.C. 1987) (same).
100. E.g., GEVURTZ, supra note 18, at 412 n. 106 ("If the committee finds the suit to be in the corporation's interest, the corporation would have no reason to ask the court to dismiss the suit and the committee's action might not result in a reported court opinion.");
101. KLEIN & COFFEE, supra note 1, at 207 n. 139 (noting that Professor Cox's examination of reported cases "may be a biased sample").
102. Although the ALI draft cited Professor Cox's survey for the proposition that SLCs always dismiss litigation, it cautioned that "decisions to continue or take over the action may not result in reported decisions, and a survey of reported cases may therefore be misleading." AM. LAW INST., supra note 24, at 161.
103. Thus it did "not adopt as its empirical premise" that SLCs "will be invariably hostile" to derivative allegations. Id. at 162.
104. GEVURTZ, supra note 18, at 435 (alteration in original). A drawback of the settlement motive, in Professor Gevurtz's view, is that "the lack of opposition seriously undercuts the ability of judicial approval to protect the corporation from poor settlements." Id.
105. James D. Cox, The Social Meaning of Shareholder Suits, 65 BROOK. L. REV. 3, 12 (1999).
106. In re Cendant Corp., 232 F. Supp. 2d at 331.
107. Carlton Invs. v. TLC Beatrice Int'l Holdings, Inc., No.13950, 1997 WL 305829 (Del. Ch. May 30, 1997).
108. Roberta Romano, The Shareholder Suit: Litigation Without Foundation?, 7 J.L. ECON. & ORG. 55, 60 (1991) ("Most lawsuits (83 of 128 resolved suits) settled. This aspect of shareholder litigation is unremarkable; most civil suits settle.").
109. The other outcomes at this stage were as follows: twice following the SLCs decision to dismiss the filer went into bankruptcy (four percent), and twice the plaintiffs withdrew their derivative claims (four percent). In one instance, the plaintiffs filed an amended complaint that ignored the earlier and less potent allegations investigated by the SLC (two percent).
110. Perhaps more rulings were based on a lack of independence, but the grounds for denial are not reliably disclosed.
111. Cuker v. Mikalauskas, 692 A.2d 1042 (Pa.1997).
112. In re Oracle Corp., 867 A.2d 904, 906 (Del. Ch. 2004) (granting summary judgment to remaining defendants). Oracle's derivative claims brought in another state were settled.
113. For example, Professors Thompson and Thomas, relying on what they concede are "limited data," note support for the view that "the appointment of a special litigation committee almost always leads to the dismissal of the case." Thompson &
114. Thomas, supra note 18, at 1791 n.147.
115. See Jonathan R. Macey & Geoffrey P. Miller, The Plaintiffs ' Attorney's Role in Class Action and Derivative Litigation: Economic Analysb and Recommendations for Reform, 58 U. CHI. L. REV. 1, 40-41 (1991) ("[B]y prosecuting the litigation, the plaintiffs' attorney demonstrates in a highly reliable way that the suit has favorable prospects for generating value for the corporation. The fart pattern suggests a probability that the litigation is indeed in the corporation's best interest.").
116. Stephen P. Ferris, Tomas Jandik, Robert M. Lawless & Anil M. Makhija, Derivative Lawsuits as a Corporate Governance Mechanbm: Empirical Evidence on Board Changes Surrounding Filings, 42 J. FIN. & QUANTITATIVE ANALYSIS 143, 159-62 (2007) (finding significant governance improvements following derivative suits that managers lose);
117. Romano, supra note 60, at 61 ("[A] significant proportion of shareholder suits are without merit");
118. Robert B. Thompson & Randall S. Thomas, The New Look of Shareholder Litigation: Acqubition-Oriented Class Actions, 57 VAND. L. REV. 133, 138, 141 (2004) (noting that acquisition-oriented shareholder litigation suits "have many of the same characteristics identified in securities fraud and derivative cases as indicators of litigation agency costs" but noting that they remain a "valuable tool to check managerial agency costs");
119. Thompson & Thomas, supra note 18, at 1750 (noting that "the claim that derivative suits are typically strike suits is much weaker than in earlier periods").
120. E.g., Macey & Miller, supra note 66, at 44 ("Most⋯ derivative litigation is settled prior to judgment When such litigation is settled, the problem of agency costs appears in a particularly problematic form. As already discussed, the plaintiffs' attorney often faces a severe conflict of interest in settling class and derivative litigation.");
121. Joel Seligman, The Disinterested Person: An Alternative Approach to Shareholder Derivative Litigation, 55 LAW & CONTEMP. PROBS. 357, 361 (1992) (noting that shareholder litigation "is part of a litigation process that more often than not results in settlements").
122. - 430 A.2d 779, 787 (Del. 1981).
123. See supra text accompanying note 30.
124. Maher v. Zapata Corp., 714 F.2d 436, 448 (5th Cir. 1983).
125. E.g., BAINBRIDGE, supra note 7, at 403 ("A substantial percentage of derivative litigation likely consists of strike suits, which are settled for their nuisance value.").
126. This excludes appeals of dismissal orders, unless the ultimate resolution is a settlement during the appeal process.
127. In her earlier study of shareholder suits, Romano found that the average duration of a shareholder suit was four years. See Romano, supra note 60, at 74 n.32. While not a perfect comparison, her study is the best source for this kind of data on derivative litigation.
128. See Daniel S. Kleinberger & Imanta Bergmanis, Direct vs. Derivative, or "What's a Lawsuit Between Friends in an 'IncorporatedPartnership? '",22 WM. MITCHELL L. REV. 1203, 1235 (1996) ("[S]pecial litigation committees are a form of alternative dispute resolution. They sift facts and make recommendations in the shadow or context of litigation proceedings, but they do not directly consume court resources and are not laden with all the procedural paraphernalia of litigation.").
129. See Tom Baker & Sean J. Griffith, How the Merits Matter: Directors ' and Officers' Insurance and Securities Settlements, 157 U. PA. L. REV. 755, 777-778 (2009) ("Assuming that the claim will settle within insurance limits, this means that increasing defense costs also decreases the total pot available to plaintiffs in settlement").
130. The EDGAR database is the SECs repository for electronic company filings. See U.S. Sec. and Exch. Comm: Filings & Forms, http://www.sec.gov/edgar. shtinl. Some firings during that period describe SLC behavior from before that period and after it, and that data has been included in this study.
131. Rulemaking for EDGAR System, Exchange Art Release No. 33-7122, 59 Fed. Reg. 67, 752 (Dec. 30, 1994).
132. Chamas & Nordlund, supra note 40, at 286 ("This phase-in was completed by May 6, 1996, and all registrants should currently be using EDGAR for their filings.").
133. See Regulation S-T, 17 C.F.R. § 232.100 (2008).
134. No available source indicates how companies were chosen to be phased into EDGAR, but there is no reason to believe that it was done in a way that would introduce bias into the inquiry here.
135. See Grimes v. Donald, 673 A.2d 1207, 1216 n. 13 (Del. 1996) ("The use of a committee of the board formed to respond to a demand or to advise the board on its duty in responding to a demand is not the same as the SLC process.").
136. - 17 C.F.R.§ 229.103 (2008).
137. Id. (Instruction No. 4).
138. See Joel Seligman, The SEC's Unfinished Soft Information Revolution, 63 FORDHAML. REV. 1953, 1964 (1995) (citing Instruction No. 4 for the proposition that "[t]he instructions to Item 103 provide some guidance concerning⋯ derivative litigation⋯").
139. See 17 C.F.R. § 229.103 (not addressing SLCs). Compare Bradshaw v. Jenkins, No. C38-771R, 1984 WL 2405 (W.D. Wash. Mar. 9, 1984) (suggesting that an SEC registrant had a duty to disclose the creation of an SLC to consider a shareholder demand), with In re BrowningFerris Indus., Inc. S'holder Litig., 830 F. Supp. 361, 368 (S.D. Tex. 1993) (holding that the omission of unsubstantiated claims of director wrongdoing in a demand letter or the existence of a special committee investigating allegations in a demand letter cannot support a proxy violation claim), and
140. Bell Atl. Corp. v. Bolger, 771 F. Supp. 686, 687 (E.D. Pa. 1991 ) (suggesting that a corporation had no duty to disclose an SLCs existence or its conclusion not to pursue litigation because the omission was not "so obviously important to an investor, that reasonable minds cannot differ on the question of materiality"),
141. and Bolger v. First State Fin. Servs., 759 F. Supp.
142. - 182, 192-198 (D.N.J. 1991) (holding that omission of existence of SLC investigating derivative claims cannot support a proxy violation claim).
143. See In re Sears, Roebuck and Co. Sec. Litig., 792 F. Supp. 977, 982 (E.D. Pa. 1992) (finding in a claim involving an omission by Sears, Roebuck and Co. of derivative litigation against directors that the "directors were not parties 'adverse' to Sears in any respect" because "Sears was a nominal defendant⋯ and the directors were also defendants.").