It seems that the announcement of any corporate transaction triggers a race to the courthouse by plaintiffs’ firms. These firms specialize in filing class action lawsuits demanding additional disclosures for the benefit of the class, which the lawyers then settle for minimal additional disclosures and the payment of an attorneys’ fees for the benefit of class counsel. A recent decision out of the Seventh Circuit, written by the inimitable Judge Posner, may herald the beginning of the end of such wasteful litigation.
In In re: Walgreen Co. Stockholder Litigation, a shareholder objected to the settlement of a class action claiming that the supplemental disclosures exacted by class counsel made in connection with Walgreen’s purchase of a 45 percent interest in a Swiss company generated no value for the shareholders. The “inevitable” class action was filed on the eve of the shareholders’ vote seeking additional disclosures. Walgreens, likely in an effort to proceed to the vote, agreed to make some additional disclosures and pay class counsel a $370,000 attorneys’ fee. The trial court reluctantly approved the settlement noting that it had “been persuaded that at least the following supplemental disclosure may have mattered to a reasonable investor.”
Judge Posner, who is widely known for his sharp analysis and even sharper writing style, expressed his desire to put an end to this cottage industry of litigation. He noted that “may have mattered” is not a standard by which these disclosures should be judged, and expressly adopted a standard articulated in the Delaware courts requiring that the plaintiffs’ counsel show that their efforts resulted in a supplemental disclosure that addressed a “plainly material misrepresentation or omission.” The opinion concludes that the supplemental disclosures made in this case fail that standard. Stating a conclusion that seems common to most of these strike suits, he concluded that the “only concrete interest suggested by this litigation is an interest in attorneys’ fees, which of course accrue solely to class counsel and not to any class members.” Accordingly, the case was sent back to the trial court for review of the settlement along with instructions that “the district court on remand should give serious consideration to either appointing new counsel … or dismissing the suit.”
The tide is turning on this form of “deal litigation” and “strike suits.” As Judge Posner noted, the Delaware courts, in which a lot of these cases have been heard, have adopted a new standard of review. His slap-down of plaintiffs’ class counsel may be entertaining, but the principle behind his ruling suggests that the courts, wisely, have begun the process of striking down strike suits.