If you own any stock, you know the frustration of getting a notice announcing settlement of a lawsuit, commenced by a lawyer on behalf of a class composed of all shareholders—you included. The notice informs you that, under this settlement, you get nothing. What that really means is you get zilch but you must pay a pro rata share of your corporation’s legal expenses and of the legal fees for the lawyer who commenced the lawsuit—often millions of dollars. I recently experienced this frustration firsthand, but as I’ll explain the outcome was surprisingly gratifying.
The game works like this. Certain lawyers have an inventory of shareholders, owning very small amounts of shares in corporations, who are on call to act as plaintiff in a lawsuit. As soon as a corporation announces an asset acquisition or sale, the lawyer finds one of his ready-plaintiffs and files a class action to stop the transaction. Such behavior is ubiquitous. As an analysis of merger litigation in the February 2014 Texas Law Review showed, the likelihood of a shareholder suit exceeds 90%.
The defendant corporation, seeking to close the transaction and avoid costly litigation, accepts a quick settlement. Both sides agree to wallpaper the settlement with meaningless “supplemental disclosures,” supposedly to demonstrate that the plaintiff lawyer contributed something of value, and thereby justify his claim to millions in legal fees. Also, the corporation is forced to agree not to oppose the fee application.
Yet as Judge Richard Posner of the U.S. Court of Appeals for the Seventh Circuit and many other respected jurists have pointed out, such class-action settlements too often result in “a meager recovery for the class but generous compensation for the lawyers.” Judge Posner has also noted that it is important that there be objectors to challenge these settlements and judges willing to scrutinize them.
Case in point: On Nov. 10, 2014, I received a class-settlement notice regarding my