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Unique Texas class action law scuttles $0 shareholder derivative settlement

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Texas has a unique solution to the problem of coupon settlements: if the lawyers settle for coupons or non-cash relief, they have to be paid in coupons or non-cash relief. [Tex. CP. Code Ann. § 26.003(b)]

The Center for Class Action Fairness has a $0 shareholder derivative strike suit settlement case pending on appeal in Texas where we make this argument, but another objector has gotten there first. In Rocker v. Centex Corp. (Tex. App. Aug. 10, 2012), the court held §26.003(b) prohibited a $1.1 million fee in a $0 settlement over immaterial merger disclosures.

Ronald Barusch has a good piece in Deal Journal on this case and on our victory in Robert F. Booth Trust v. Crowley:

These junk settlements, as I refer to them, do nothing to incentivize corporations and their advisors to produce better disclosure. In fact they do the opposite because, as everyone involved in this process knows, the plaintiffs' bar essentially sells insurance policies to public companies. For a bit of additional disclosure or other minor hassle and a small payment to the other side's lawyers, broad releases are available.

I have no objection to generous compensation for plaintiffs' lawyers who uncover significant wrongdoing, particularly if they obtain large payments for shareholders. That is what directors and their advisors fear, and fear is a great motivator.

But lawyers who want a fee award should have to produce results to earn their money. A substantial monetary judgment would be a good indication of such a result. The Texas cash only rule might be a bit harsh in that an injunction which forces a deal to be restructured in a way with material tangible financial benefits to the plaintiffs might be another. But judges in other jurisdiction following the lead of these two recent cases on junk settlements would be a good first step towards a better system.

See also.

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Isaac Gorodetski
Project Manager,
Center for Legal Policy at the
Manhattan Institute
igorodetski@manhattan-institute.org

Katherine Lazarski
Press Officer,
Manhattan Institute
klazarski@manhattan-institute.org

 

Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.