Professor Minor Myers’s paper makes a very important contribution to the legal scholarship regarding the role of special litigation committees as well as the role of independent directors, while illustrating a key cautionary tale on the use of empirical research in the corporate governance literature. Professor Myers’s paper begins with the observation that most commentators view the special litigation committee enterprise as “little more than a show trial designed to exonerate the accused.” He then points out that this view has been buttressed by available empirical research—research to which most commentators refer when making the claim that most special litigation committees almost universally decide to dismiss derivative litigation. He also points out that this view resonates with our understanding of human behavior. ndeed, members of special litigation committees are appointed by the very directors upon whom they must pass judgment. Why should it be surprising, therefore, that such members would recommend against seeing their fellow directors being the subject of protracted litigation? Even the Delaware Supreme Court appears to have recognized the need for skepticism when reviewing actions of a special litigation committee because it must pass on the fate of other directors, and hence may adopt a “there by for the grace of God I go” attitude when conducting its investigation. Hence, as Professor Myers points out, many people view the special litigation committee as naturally biased. More importantly, the available research overwhelmingly supported this view. Professor Myers’s paper, however, uses an original data set to test the validity of this presumption regarding special litigation committees, and ultimately finds that presumption to be severely flawed. Indeed, his research finds that special litigation committees sought some formal relief against defendants about 40% of the time (i.e., 30% of the time they sought some form of settlement while 10% of the time they took over litigation to pursue claims against one or more defendants).

As Professor Myers’s notes, these findings have important implications for our understanding of special litigation committees. Indeed, the hope was that such committees would provide a reliable internal mechanism for boards to resolve derivative claims. Instead, many have viewed the special litigation committee with suspicion, and this view has had important repercussions.  For example, it has led some courts—like Delaware—to impose heightened scrutiny on the decisions of those committees, while other jurisdictions have refused to recognize their authority.  Moreover, it has led commentators to question the legitimacy of their actions and decisions.  Of course, Professor Myers cautions that his paper should not be used to prove that special litigation committees can be uniformly trusted. The paper nevertheless suggests that they should be viewed with much less skepticism, and hence may serve to validate their role.

Professor Myers also notes that his findings could have important implications for our understanding of independent directors. Indeed, the hallmark of the special litigation committee is that it contains independent directors. And more and more, corporations find ourselves relying on independent directors to serve as monitors. This is revealed in the requirement for audit and other committees to be completely independent as well as the call for a majority, if not super-majority, of the board to be independent.  However, the notion that independent directors—in the context of special litigation committees or otherwise—can appropriately perform their monitoring role is in tension with the presumption (apparently supported by empirical research) that such directors tend towards bias.  Professor Myers’s paper suggests that this tension may not be as great as we initially perceived it to be.  Again, I believe Professor Myers would agree that it is important not to overstate the claim.  However, his paper certainly takes the first step towards supporting the contention that independent directors can make decisions free from bias, and hence deserve to be given their role as monitors.

Interestingly, Professor Myers’s paper also can be read as a cautionary tale about the use of, and reliance on, empirical research in legal scholarship. Indeed, Professor Myers points out that the literature in this area almost uniformly casts doubt on the role of special litigation committee and it does so by relying on empirical data. And yet that data has some short-comings in at least two respects. First, that data dates back to the 1980s.  Thus, as Professor Myers’s notes, Professor Cox performed pivotal research on the behavior of special litigation committees in the 1980s appears.  But such research is basically “the entirety of the evidence on what special litigation committees do.”  To be sure, many current assertions about the behavior of special litigation committees note that the data upon which such assertions are made are limited and even dated. And yet the assertions have appeared to take on a life of their own, generating a perception out of sync with reality.  Or at the very least generating one that may be overstated. Second, Professor Myers’s suggest that there may have been some bias in the data used in the 1980s survey.   Indeed, an important question that arises from Professor Myers’s paper is—what explains the difference between the 1980 survey and this more recent one?  One explanation could be the passage of time—that is committees have gotten more rigorous over time.  However, such an explanation does not appear to be consistent with the current data.  Instead, the difference may be in the data set used.  The 1980s survey was based on reported cases.  Professor Myers suggested that reported cases were more likely to be biased in favor of a higher level of dismissals.  Indeed, to the extent a committee recommends dismissal, there is a greater chance that plaintiffs will challenge the recommendation, and thus a greater chance that the case would result in protracted litigation and be reported.   This appeared to have been borne out in Professor Myers’s research.  In this regard, Professor Myers’s paper underscores the importance not only of being careful regarding the potential short-comings of research, but also of being sensitive to the timing of research.

Alas, I would raise a couple of questions and issues about the paper. First, I wondered about the shortcomings of Professor Myers’s data. Indeed, while he certainly appeared to have a broader cross-section of companies, Professor Myer’s nevertheless collected his data from filings with the SEC.  This left me wondering if there would be a difference between the behavior of special litigation committees in public versus private entities.  To be sure, there were a few non-public companies in the data set and at one point, Professor Myers made the observation that there did not appear to be any difference in behavior between the companies. Yet I wondered if this question should be explored in greater depth, and if there was a potential that special litigation committees would perform differently in the context of smaller or less scrutinized companies.

Second, while it the data does seem to undermine blanket claims about the bias of special litigation committees and independent directors, it nevertheless could be viewed as confirming the existence of at least some bias. Indeed, Myers’s research revealed that about 60% of special litigation committees recommend dismissal.  By contrast, only 20% of cases ultimately ended in dismissal.  As a result, the 60% number appears to be too high.  Then too, special litigation committees recommended settlement 30% of the time. In contrast, 70% of cases ultimately end in settlement. Myers’s paper makes the point that this 70% number for settlements is consistent with the rate of settlement in the context of civil suits more generally. In this regard, while derivative suits may end up at the same place as other civil suits, it does appear that special litigation committees’ dismissal recommendation rate is overly high, while their settlement recommendation rate is too low. And while there may be other factors to explain this phenomenon, bias could be one of them.

Third, I wondered if there should be more discussion about alternate views with respect to special litigation committees and independent directors. On the one hand, there seems to be no question that many scholars tend to view special litigation committees with skepticism. On the other hand, this view does not appear to be universal among judges. Indeed, the paper cites New York's Auerbach approach and other cases reflecting the fact that there are lots of jurisdictions that do appear to give great deference to special litigation committees. Given the apparent overwhelming weight of the scholarship in this area, what explains the actions of these courts? Then too, as Professor Myers’s points out, there has been an increased use of, and reliance on, independent directors and independent committees. Again, given the research and sentiments expressed by Professor Myer, what accounts for this?

And finally, I would have enjoyed greater discussion on the implications of the data. Indeed, the paper hinted at what his research could mean for special litigation committees and issues of director independence, but I wondered if Professor Myer’s had his own views about that meaning. For example, should we alter the scrutiny placed on special litigation committees? Should we continue the trend towards greater reliance on director independence in other context, or is the special litigation committee a unique vehicle? These are just some questions that the paper raises about which I would have enjoyed some discussion.

Ultimately, the paper was an intriguing and important contribution to the corporate governance literature and I thoroughly enjoyed it.

Junior Scholars | Bookmark

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8345157d569e200e553dd95128833

Links to weblogs that reference Lisa Fairfax on Special Litigation Committees: