Access and the Opposition: Be Careful What You Wish For

We've noted before the often short sighted approach taken by opponents to shareholder access.  The Cox Commission proposed a wholly ineffective form of access (requiring an access bylaw to pass first) yet it was opposed with enormous vehemence.  The consequence has been a change in administration and an even more invasive form of access (one that is much better and promises to be more effective).  Anti-access groups are grousing about possible litigation. 

The likely effect of litigation?  Either a judicial decision that clarifies the broad nature of SEC authority (leading to the prospect of even more intrusive corporate governance regulation) or congressional intervention, largely to the same effect.

With that in mind, we note the study Institutional Monitoring Through Shareholder Litigation, by professors Cheng, Huang, Li and Lobo.  The study examines the impact of institutional investors as lead plaintiffs.  Before we give some of the conclusions, recall that the lead plaintiff provisions in place today were included in the PSLRA.  The PSLRA was an attempt to cut back and restrict securities litigation.  Specifically, the lead plaintiff provisions were designed to stop the race to the courthouse and end or at least limit lawyer driven litigation.  In other words, the provisions were inspired by those who opposed the plaintiffs' bar and the existing method of determining lead plaintiffs. 

What has been the consequence of this requirement?  First, the number of insitutional lead plaintiffs is increasing.  "The percentage of lawsuits with institutional lead plaintiffs has more than doubled from less than 15% in 1996 to more than 30% in 2004."  And the consequence?  As the study concludes:

• After controlling for these determinants of having an institutional lead plaintiff in our multivariate regression analysis, we find that relative to lawsuits with an individual lead plaintiff, lawsuits with an institutional lead plaintiff are less likely to be dismissed and have significantly larger settlements. Further analysis indicates that all types of institutions show significantly better litigation outcomes with public pension funds generating the largest settlement amount. We also find that within three years of filing the lawsuit, defendant firms with institutional lead plaintiffs experience greater improvement in board independence than those with individual lead plaintiffs.

In other words, the reform in fact encouraged greater participation by institutions.  And their participation has resulted in a lower likelihood of dismissals and greater payouts. 

Opposition to access will also likely generate these types of unintended consequences.  Comparing the last access proposal to the current one shows that this has already occurred.