ABUSIVE LITIGATION

The mail on Monday brought a “NOTICE OF PROPOSED SETTLEMENT OF CLASS AND DERIVITIVE ACTION AND HEARING” in the matter of Associated Estates Realty Corporation Shareholder Litigation.

As a former shareholder a detailed reading of the notice was undertaken to learn what, if anything, the former shareholders were receiving out of the settlement. The bottom line was absolutely NOTHING. But, the lawyers were getting $390,000 from the plaintiffs in the litigation. The apparent justification for the settlement was that the suit caused enhanced disclosures.

The litigation arose out of an agreement by Associated to effectively sell the company at $28.50 per share. Immediately on the announcement several law firms began trolling for lead plaintiffs willing to participate in a class action suit and, when plaintiffs stepped forward suits were filed.

Long term shareholders, who stayed informed about the company knew that the company had not done anything or taken any action detrimental to the shareholders interest. The shareholders knew that, in December of 2014, the company announced that it had retained Citigroup Global Markets, Inc to assist the Board in reviewing the Company’s business. Usually, announcements like this are interpreted by the market as indicating that a company might be “in play”. Thus, any potential purchasers of similar companies would have focused on Associated. Then, in March of 2015 an activist shareholder group announced its intention to nominate candidates to replace three specific directors. Finally, in April of 2015 an Agreement and Plan of Merger was signed with Brookfield whereby shareholders would receive $28.50 per share in cash for their shares. Then followed the filing of several shareholder derivative actions.

These lawsuits were frivolous and abusive with no indication of righting any grievous wrongdoing by the Company. It is apparent that the sole purpose of the lawsuits was to earn fees for the lawyers with no motivation to enhance the shareholder payout. Based on everything that was public these lawsuits should have been very winnable and should have been dismissed. This prompts the question of why would the defendants agree to a settlement? The answer is simple. Settlement was “cheap” considering the exposure to mounting legal costs to defend and the avoidance of any delays to the transaction. These lawsuits were nothing but a gigantic “shakedown” by unscrupulous lawyers motivated by the knowledge that, for various and sundry reasons a settlement was a most probable outcome rather than being motivated to correct wrongdoing.

Followers of legal gymnastics are aware that any announcement of a merger or buyout is grist for the legal mill. Shareholder derivative actions are very common and have been for years despite the very negative view of the law firms that bring such suits. Over 20 years ago an attorney being retained by the independent directors of a company involved in a merger began the first meeting by saying “when you get sued – any you will note that I said ‘when’ not ‘if”…” And, he was correct. The company and directors did get sued despite any identified wrong doing.

While the class action attorneys in the Associated case are part of the problem, the larger problem is that the system is “broken”. There are probably many causes of problems. First, is holding a law license has become license to steal with lawsuits instead of guns rather than a permit to engage in an honored legal profession. The law has ceased being a profession and has become a business. When it was a profession attorney’s regularly refused to take on cases without merit. That appears to be no longer the case. Today potential plaintiffs will just shop around until they fin a lawyer hungry enough to take the case and the lawyer moves ahead knowing that, at worst, fees wll be paid via settlement. Another part of the problem is that judges permit plaintiff attorneys to use a “market basket” of causes of action without concern of receiving sanctions for allegations that are without any merit. Attorneys apparently are not required by the Courts to do their homework first, before filing suit. The next problem is discovery which initially was supposed to streamline litigation but instead has become a weapon for harassment employed by attorneys to try to force parties to drop out. At least, the State of Delaware Courts are trying to do something about the problem by making it far less certain that meritless cases receive settlement approval resulting in only legal fees being awarded, as in the Associated case.

Another problem is recognized when Corporations are found to have committed a wrongful act and reach settlement to pay huge fines to the government. The corporate personnel responsible for the wrongful act escape jail time and the Corporation, not they, pays the fine. So, the shareholder investors are the ones punished by the government and other litigants and not the wrong doer. Something is wrong with this picture.

Shareholders need to be more aware as to how litigation can adversely impact their investments without any potential to be protected as it is they, not the wrong does, who get the privilege of paying the bill.

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