This Lawyer Is Making It Less Profitable to Sue When Companies Merge
David Duggan opened his mail last August to find he was part of a legal settlement. He’d been a shareholder in Crestwood Midstream Partners LP, a natural gas pipeline company that had recently merged with one of its affiliates in a $3.5 billion deal. A group of attorneys Duggan had never heard of, representing Crestwood investors, had objected to the terms of the deal and settled a class-action suit brought in the Southern District of Texas against the company and its affiliate. Yet investors didn’t get a check. All that Duggan found in the mail was a dozen pages of legal disclosures.
Duggan was upset. A retired lawyer himself, he knew about “disclosure-only” settlements like this one. Someone would sue a company involved in a merger for failing to provide a piece of information that might be relevant to the merger deal and then settle when the company agreed to disclose it. The plaintiffs wouldn’t get any money—but the lawyers would have their fees paid by the company as part of the agreement. In the Crestwood case, attorneys were paid about $575,000.
Duggan also knew that a well-known federal judge elsewhere had just issued a ruling labeling disclosure-only suits “a racket.” So he wrote a letter complaining about the settlement to the judge in the case. That got the attention of the one man in the country most interested in finding people like Duggan: Ted Frank, professional objector.
Frank is an attorney and the director of the Center for Class Action Fairness at the Competitive Enterprise Institute, a Washington think tank. Representing a dissatisfied class member like Duggan, he shows up at court to challenge settlements, often with the goal of scuttling them, to the dismay of both plaintiffs’ attorneys and companies that just want to put the suit behind them. “I have no friends in the courtroom,” says Frank, whose résumé includes vetting Sarah Palin as John McCain’s vice presidential nominee and winning a substantial sum of money in a televised poker tournament.
Frank got his start in objections in 2009 when he learned that he and all others who’d purchased a Grand Theft Auto game were due a total of $30,000, the result of a class action accusing the game’s maker of explicit sexual content. When Frank learned the attorneys who’d brought the suit were due $1 million, he rented a car, drove to New York, and voiced his first objection. The settlement was denied.
Many objectors hope to create just enough chaos that it will be worth it for one or both parties to pay them to go away. Frank is more mission-driven: He gets paid a salary of about $200,000 by CEI and says he represents only clients who refuse to take money to drop the objection. His goal, he says, is to make it more difficult and less profitable for lawyers to pursue what he considers to be abusive suits.
Tamping down lawsuits against corporations has long been a conservative cause, and CEI is on the libertarian right—it has ties to the Koch brothers, and opposes many financial and environmental regulation. But Frank’s approach can scramble traditional political narratives. “Ted has been on the right side of a number of cases,” says Alan Morrison, an associate dean at George Washington University Law School and the co-founder with Ralph Nader of the litigation arm of the consumer-interest nonprofit Public Citizen. “We were the proverbial skunk at the garden party, too.”
Although he objects in all varieties of class-action suits, Frank and a shortlist of people like him have been particularly effective in pushing back on disclosure-only settlements. Critics call such settlements a merger tax, because litigation is so common when two companies combine. According to financial consultant Cornerstone Research, about half of all deals in 2008 with a value of more than $100 million led to a lawsuit. For the seven years that followed, that percentage never dipped below 86 percent. Why those numbers shot up so quickly is the subject of speculation. One theory points to a decision by press-release news wires to allow plaintiffs’ firms to announce their intent to sue, thereby making it easier to find one essential ingredient of a suit: a shareholder willing to be a plaintiff.
But substantially fewer merger lawsuits are being filed today than just two years ago. That change is largely attributable to Frank and those he’s encouraged. “When I was asking myself how I was going to do merger objections, I thought of Ted,” says attorney Sean Griffith. “He’s the fountainhead of this kind of work.” Griffith, who directs Fordham University’s Corporate Law Center, successfully objected to a settlement last year involving the merger of real estate websites Trulia Inc. and Zillow Group Inc. His victory in January 2016 set a precedent in Delaware, the state where plaintiffs’ attorneys in merger cases used to make much of their money. That year the percentage of deals that attracted a lawsuit in Delaware dropped by half, according to a study to be published in the Vanderbilt Law Review.
Next came an objection by Frank before the 7th Circuit Court of Appeals and his real target: Judge Richard Posner, one of the most famous and influential federal judges not on the Supreme Court. “When he speaks,” Frank says, “people find out about it.” Frank was trying to stop a settlement involving Walgreen Co.’s merger with a Swiss pharmacy chain. Posner wrote the decision in Frank’s favor in August 2016. It said: “The type of class action illustrated by this case … is no better than a racket. It must end.”
Frank took on the Crestwood case after Duggan wrote his letter. This time, he didn’t succeed: Last month, the objection was thrown out because, the court said, it came too late. Frank’s opponent in the case on the plaintiff side was Juan Monteverde, who is also his foe in a case he and Griffith are trying in New York. Monteverde declined to comment. His co-counsel on the Crestwood case, Thomas Bilek, argues that the settlement put more information in the hands of investors. “Obviously more disclosure is better for shareholders,” he says. “That’s a lesson we’ve learned again and again since Enron.”
Even though Frank has helped to limit the number of merger suits he considers frivolous being filed, he’s unlikely to stop the practice completely. There are thousands of mergers every year, and lots of lawyers scrutinizing them. “We’re playing a game of whack-a-mole,” he says.