Sean Griffith’s shareholder objection project brings scholarship into the courtroom.
When the private equity firm Thoma Bravo bought Riverbed Technologies in 2015, lawsuits were a given. So much litigation follows in the wake of corporate mergers these days that lawyers have developed a standard playbook for handling them: Divulge a few extra details about the deal and pay the lawyers on the other side in exchange for immunity from litigation going forward. Even if down the road it turns out that the companies have shortchanged their shareholders, nobody will have to pay for it. Following this script, the lawyers on both sides must have expected the Riverbed deal to go off without a hitch.
What they hadn’t counted on was the objection of Fordham Law Professor Sean Griffith.
Griffith, an expert in mergers and acquisitions, had long studied these “disclosure only” settlements, and he planned in Riverbed to do something about it.
“When you have litigation in every deal and a settlement in every lawsuit, there’s something wrong,” says Griffith, the T.J. Maloney Chair in Business Law. “It’s become so routine that these cases come with a price tag. It’s a deal tax.”
Shareholder suits are supposed to provide a check on management misconduct and corporate greed, but Griffith and other legal experts say the lawyers often cobble together settlements so quickly that they can miss the real malfeasance that is sometimes lurking underneath. Even if the wrongdoing comes to light later on, the companies have Teflon-coated themselves against future claims. “The system has been paying out good claims and bad claims indiscriminately,” says Griffith. “The incentive for lawyers to really investigate a claim is undermined by the prospect of an automatic six-figure payout for doing next to nothing.”
Griffith’s ideas on shareholder suits arrived in court ahead of his objection. Judges were already citing his 2015 analysis of the system, “Confronting the Peppercorn Settlement in Merger Litigation: An Empirical Analysis and a Proposal for Reform,” co-written with Penn Law Professor Jill E. Fisch and Berkeley Law Professor Steven Davidoff Solomon. Now Griffith was putting that paper into practice. He had earlier purchased a small number of shares in 50 or so publicly announced acquisitions, planning to intervene at settlement; Riverbed was the first case to get to that stage.
At the settlement hearing, Delaware Court of Chancery Vice Chancellor Sam Glasscock III was asked to approve a deal where shareholders would get some additional disclosures, the company’s directors would get protection against any further litigation, and the lawyers would get half a million dollars in fees. However, before the gavel dropped, Griffith, who owned 100 shares of Riverbed, raised an objection. Through his counsel, Joseph Christensen, he argued that the settlement benefited everyone but the shareholder class on whose behalf it was supposedly made. The shareholders, as usual, got nothing. Griffith asked Glasscock to reject the settlement.
The decision was a moral victory. Although Glasscock approved the settlement, he also agreed with Griffith that the disclosures were essentially worthless. He reduced the lawyers’ fees and wrote an opinion pledging that Delaware, the legal home of most large corporations in America, would no longer accept these kinds of settlements going forward. Settlement proponents could expect much greater scrutiny in the future.
The opinion validated Griffith’s campaign and helped unsettle the status quo in Delaware. Buoyed by the Riverbed opinion, Griffith filed an amicus brief in a settlement hearing involving Trulia, an online real estate site. Griffith’s brief helped convince the judge in that
case to reject the settlement and issue an opinion setting forth a tougher standard for getting shareholder settlements approved.
“We got close in Riverbed, but Trulia is the case that changed the rules,” says Griffith. “And there are signs that it is working. Merger litigation is down.”
Who Watches the Watchmen?
Griffith didn’t set out on his scholarly path with plans of directly influencing the practice of law. However, influence came naturally as he pursued his research in corporate governance. Most of his work addresses this area, which he defines broadly as the set of incentives and constraints operating on a corporation. It is a critical subject, Griffith says, since corporations play such a central role in our economy and our society. “Corporations have our lives in their hands,” he says. “It’s essential to know how they work.”
Griffith’s first set of papers examined whether directors can bind their corporation to a future act, such as a merger, and the extent to which they must keep their options open. That research led to another group of articles and an eventual book, Ensuring Corporate Misconduct: How Liability Insurance Undermines Shareholder Litigation (University of Chicago Press, 2010). Co-authored with Professor Tom Baker of Penn Law, the book looks at how managers use insurance to shield themselves from shareholder suits while steering their companies in potentially dangerous directions.
More recently, Griffith has embarked on a new area, largely overlooked in the legal academy: corporate compliance. In May, he published “Corporate Governance in an Era of Compliance” in the William & Mary Law Review. The article explores what he calls a “quiet revolution” in corporate governance, in which boards have been forced to adopt and staff compliance departments to make sure the company follows rules and regulations. Griffith calls compliance a new structure of authority within the firm, one that is potentially at odds with other sources of authority, such as the legal department or, even, the board. Chief compliance officers at large firms may oversee staffs that can number into the hundreds or thousands. Griffith says this function doesn’t fit easily with standard notions of board governance. “The government is telling companies they have to have a structure inside the firm for bringing outside rules and regulations in. That fundamentally changes the way companies work,” he says.
In the paper, Griffith argues that the Era of Compliance raises a set of big questions about what corporations are and how they are supposed to work in our society. Whose interests does the corporation serve? What is the best way to make corporations obey the law? And how do we measure whether compliance is effective? Ultimately, the paper focuses on transparency. Griffith criticizes compliance reforms that, he writes, “are not the product of a transparent and politically accountable legislative process, nor are they the product of regulatory rule making, subject to cost-benefit analysis and public comment. Rather, they are extracted in an opaque settlement process under the Sword of Damocles.” More transparency, he concludes, is the first step in making compliance work better.
Griffith wrote the paper in order to jump-start a dialogue on compliance. To make sure the conversation is heard, Griffith serves as an adviser to the American Law Institute’s project on the Principles of Compliance, Enforcement, and Risk Management. At Fordham, he helped create the School’s LL.M. and M.S.L. degrees in corporate compliance, which train students in risk assessment, codes of conduct, crisis management, corporate social responsibility, and other skills they will need to advance in careers as compliance officers. “This is a great example of where research can cross-pollinate a larger curricular objective of the School,” says Griffith. “Fordham is beyond doubt a leader in the emerging field of corporate compliance.”
An Unlikely Path
Before the inner workings of corporations gripped his imagination, Griffith, a Pennsylvania native, studied philosophy and playwriting at Sarah Lawrence College. He discovered his passion for law and economics at Harvard Law School after attending a series of lectures delivered by Judge Richard Posner, a founder of the field. “That set of lectures was an intellectual awakening for me,” Griffith says. “It changed the way I saw the world.”
After law school, Griffith moved on to Wachtell, Lipton, Rosen & Katz, one of the top corporate law firms in the world. “It wasn’t unusual, in fact it was customary, to read about your deals on the front page of the Wall Street Journal,” he says. Griffith was drawn to the natural drama of mergers and acquisitions. “It’s the most exciting corporate work because the stakes are so high,” he says. “It’s the shareholders’ last chance to realize value from their investment, and often the deal can make or break the buyer. Egos get involved. There are epic battles.”
Ultimately, the bigger questions underlying the work brought Griffith back to academia. After two years of practice, he turned to scholarship and the classroom, but his experience in corporate practice fuels his research. And it inspires his students.
“Some students come to the basic Corporations class scared or thinking they are going to hate it because business is boring or evil,” he says. “But then they open their eyes to how fun and intellectually stimulating the cases are, and learn something they had been resisting their whole lives. It’s great being a part of that process.”
Griffith has also taught at the law schools of Penn, Connecticut, Columbia, and NYU, but he has been at home at Fordham since 2006. “It’s a world-class institution in the heart of the corporate and financial world,” he says.
As director of the Fordham Corporate Law Center, Griffith takes full advantage of New York City’s Wall Street pedigree to bring prominent guest speakers to the School for lectures, workshops, and other timely discussions. The center has hosted high-profile speakers from Delaware and from the federal judiciary, as well as chairs and commissioners of the Securities and Exchange Commission. They join an impressive list of policymakers, scholars, judges, and practitioners who have come to Fordham to share insights with students, faculty, and alumni. “It’s our own corporate law think tank,” says Griffith of the center.
Through the center, Griffith works with various student groups, including the Committee on Diversity in Business Law, whose goal is to secure mentors and internships for students who are traditionally underrepresented in business law. “The committee’s mission is to connect with people who may not have had much exposure to business law in the past to engage them and support them as they explore the field,” he says.
Griffith hasn’t shied away from making connections for himself at Fordham either, reaching beyond the Law School to scholars across the University. He has co-authored two papers with Natalia Reisel, an assistant professor of finance and business economics at the Gabelli School of Business, and he has co-taught courses with John Finnerty and Mario Difiore, also of the Gabelli School.
For Griffith’s students, learning about corporate law is not limited to casebooks; they dive in to live cases and controversies. Students in his M&A seminar monitor his portfolio of acquired companies and evaluate the materiality of supplemental disclosures. Griffith asks the students to pull the disclosures from EDGAR (the SEC’s electronic data system) and analyze them against the other information in the proxy statement. He then pairs off the students to brief the materiality of the disclosures, one making the case for, the other making the case against. All this research then finds its way into his objections in court. “We follow the litigation from the complaints through to settlement, looking at both sides of the case,” says Griffith. “Then I use it in court. Students love this connection between the classroom and the courtroom.”
After taking the M&A seminar and other classes with Griffith, Marianna Wonder ’17 enthusiastically agreed when Griffith invited her and another student to help him brief an objection to a settlement in New Jersey involving a company called Metalico. “I have a master’s in business, and Professor Griffith’s classes helped get me interested in the legal side of corporations and M&A,” she says. “He’s a great professor. He’s very approachable and funny, and he gives full and patient answers when you’re not sure about something. He’s easily one of the most influential professors I’ve had.”
Working a summer associate job at a Wall Street law firm, Wonder sat in an office with her co-workers when Griffith sent her the news that the New Jersey judge had rejected the Metalico settlement based on their objection. “We won!” she shouted to her office mates. She had already told this group of corporate lawyers about the case and they had been impressed that she had “done something real,” especially since it was in their area of expertise. “When I started to work at the law firm, having something more substantial to talk about with the lawyers here put me a little closer to their level,” she says.
A Battle Unfinished
Griffith’s fellow Fordham faculty rave about him as much as his students do. Professor Richard Squire, also an expert in corporate law, says he admires how Griffith parlayed his prestige as a professor and his well-received scholarship into direct action that improved the law and encouraged others to adopt and continue his work.
“His scholarship shows that shareholder settlements are often without merit and harm shareholders. And his campaign has been extremely influential,” says Squire. “It illustrates the best way that a legal scholar can influence the development of the law. He was able to do this successfully because of the prestige he carries as a well-known corporate law professor and especially because of his well-respected scholarship in this area.”
The settlement objection project continues. Because so many businesses are incorporated in Delaware, winning there was key, but it is only a first step. Because litigation can also be brought where corporations are headquartered, Griffith has to convince courts in those states too.
“There are 49 more steps,” Griffith says.
Griffith, along with his small team of lawyers and volunteers, has prepared objections or assisted with objections in Delaware, New York, New Jersey, California, Massachusetts, Michigan, and North Carolina. “People contact me all the time about these settlements. Some are shareholders looking for help preparing an objection. Some are businesspeople or lawyers offering to help, trying to put an end to something that strikes them as unfair.”
The work will come to an end, Griffith says, when there’s nowhere left for the settlements to go. “Hopefully I’ll put myself out of business,” he says.
Story by Steve Wilson, photographs by Robert Essel