(Reuters) - This week is Stuart Grant’s last as a fulltime lawyer. On June 30, the most prominent face of shareholder litigation in Delaware will no longer be a partner at Grant & Eisenhofer, the firm he cofounded with Jay Eisenhofer 24 years ago. Grant will stick around for several months to finish up cases, but his focus will be on a start-up litigation finance venture, Bench Walk Advisors, backed by two of his longtime clients and stocked with an advisory board of G&E partners.
Grant is retiring from his practice at an unsettling time for shareholders’ lawyers. During an interview earlier this month at his office in Wilmington, he told me his biggest regret, as he looks back at a 31-year career, is that Delaware judges have seemingly spent the past few years ratcheting back shareholder advances against corporate fiduciaries. Delaware Supreme Court rulings like Corwin v. KKR (125 A.3d 304), CalSTRS v. Alvarez (179 A.3d 824), DFC Global v. Muirfield (172 A.3d 3460) and Dell v. Magnetar (2017 WL 6375829) – all major decisions against shareholders, all argued and lost by Stuart Grant – made the prospect of moving full time to Bench Walk a lot more attractive.
“Let’s face it,” Grant said. “If you go back five, 10, 15 years ago, we were winning 90 to 95 percent of our cases. I liked that. In the last year and a half, we’ve probably lost more than we’ve won. I’m not used to that. It’s not so much the economic effect, although there has been an economic effect. It’s a happiness effect. I like winning. I don’t like losing.”
Bench Walk is the advisor to two funds, one backed by a hedge fund client Grant declines to identify, which has already put up more than $100 million, and the other backed by Merion Capital, best known as an appraisal arbitrageur but now looking for new opportunities, Grant said. Bench Walk is looking for investments of between $1 and $25 million in an array of investments based on what Grant called a “legal thesis”: traditional litigation finance, from commercial contracts to mass torts; buying claims or judgments; buying IP and lending directly to law firms. Days after our interview, a publicly-traded data security company, Route1, disclosed that Bench Walk had invested $1 million in its patent infringement suit against AirWatch.
Grant told me his experience running a plaintiffs’ firm and litigating every day has taught him to price litigation risk in a more nuanced way than most bankers or defense lawyers. “When I look at a case, I may say, ‘It will take $5 million to get this to trial. But what’s the weakness of the case and where will it be exploited?’” If the likely turning point of the litigation is going to be a motion to dismiss that costs a half-million dollars, he said, that’s a different risk than a case that will be decided after a Daubert hearing and a summary judgment motion.
As Grant steps back from day-to-day practice, I asked him to reflect on several topics, from changes in Delaware and federal securities fraud practices to the potential consequences of mandatory shareholder arbitration. What follows are excerpts from our conversation.
When Grant and Eisenhofer left Skadden Arps Slate Meagher & Flom back in 1994, their plan was to begin representing institutional investors in securities class actions. After the Private Securities Litigation Reform Act passed in 1995, Grant said, plaintiffs’ firms rushed to establish relationships with public pension funds. “You’d see a firm of 10 lawyers with six offices, five of them in the state capitals where they happened to represent the pension fund.”
He and Eisenhofer began concentrating on private funds, including funds that choose to bring their own opt-out suits instead of vying to be appointed lead counsel in securities class actions. In retrospect, he said, that’s left the firm well-positioned as public funds pull back from securities class actions.
“There’s definitely been a shift of who’s been bringing these cases,” Grant said. “A lot of the big funds don’t want to bring them anymore. They’ve just had bad experiences … I’m not saying that New York City doesn’t bring one a year, CalPERS or CalSTRS doesn’t bring one a year. Maybe the top five or six cases will have these really huge funds. But if there are 50 that are brought a year, you look at the next 40, they’re really not being brought by the big pension funds.”
In part, Grant said, that’s because there are fewer promising securities class actions. The stock market has generally been rising – which means the market has shrugged off troubling disclosures – and audit firms have become more vigilant after they were stung with eight- and nine-figure settlements in previous waves of fraud litigation. Grant told me he considers the awakening of audit firms as corporate watchdogs to be one of his signal accomplishments as a shareholders’ lawyer.
Grant & Eisenhofer’s first big reinvention, Grant said, was a move from federal-court securities class actions to shareholder litigation in Delaware. The firm is one of the most prominent shareholder firms in Chancery Court, winning multimillion-dollar fee awards in landmark breach-of-duty cases in Delaware Chancery Court. “Chancery is a common law court,” Grant said. “Whole concept of fiduciary duty is common law. It gets built case by case by case, and in that regard, I think we really did help develop the law.”
Those advances, however, have been substantially reversed in the past few years, as the Delaware Supreme Court has erected ever-higher barriers to shareholder claims against corporations and their boards. In particular, Delaware courts have shielded corporate directors from scrutiny in M&A transactions. “The courthouse doors are effectively closed in Delaware,” Grant said. “You look at each piece, and standing by itself it doesn’t look like that unreasonable a decision. Then you put it all together and you realize that it’s almost impossible to challenge a deal in Delaware.”
In part, he said, shareholders’ lawyers can blame themselves. When deal challenges became ubiquitous, he said, judges balked. “They hated these holdup cases,” Grant said. “That was one of the reasons they swung as far as they did.”
But Delaware judges, he said, are also keenly aware that their state depends on revenue from the businesses incorporated there. “Corporate America, or what I call Delaware Inc, has made very clear to Delaware, to legislators, to the judiciary, that it understands how important it is to Delaware,” Grant said.
Delaware judges, both on the Supreme Court and in Chancery, have developed the unusual tradition of frequently appearing at conferences and symposiums to discuss Delaware law. Grant said that practice deepens the ties between state judges and corporate defendants and their lawyers.
“I think they do it with the best of motives so I’m not questioning their motives, but Delaware has only judiciary that thinks part of its role is to be an ambassador,” he said. “Our Supreme Court and most of our Chancery Court are giving speeches, going to conferences, being ambassadors on a regular basis. Some of them, the more popular ones, more than once a month. The overwhelming majority of those functions are hosted by the corporate defense bar or folks with corporate interest … If you go to the echo chamber, you hear the same thing over and over again.”
Judges who deliver corporate-friendly opinions go to corporate events and hear how smart they are, Grant said. And meanwhile, “when you’re (Vice-Chancellor) Travis Laster and you have an opinion that smacks someone, the echo chamber tells you how big of a jerk you are, you start to wonder about that. Everyone else starts to say, I don’t want to be considered that jerk next time.”
Grant said the pendulum will probably begin to swing back toward shareholders, especially if judges in other states issue rulings that highlight the high bar Delaware has set. Xerox shareholders, for instance, probably wouldn’t have been able to enjoin an announced $6.1 billion acquisition by Fujifilm if they’d been in Chancery Court instead of New York State Supreme Court, Grant said.
“The judge in Xerox didn’t have the Delaware glaze,” Grant said. “The law on preliminary injunction in Delaware, it’s a balance of hardships. In Delaware, I’m still not sure why, the judges here have decided that when they balance hardships, if there’s not another deal out there, the hardship to the shareholder of losing a deal is greater than the hardship of them being misled or getting a lousy deal because they can vote it down. Judge (Barry) Ostrager said, ‘No, no, no, I’m weighing the balance of hardships and I think the hardship is much worse from being forced into this deal than if I enjoin it and let it play out.’ He was absolutely right.”
According to Grant, the first person to realize the potential boon of challenging deal prices through individual shareholder appraisal actions was his partner, Jay Eisenhofer. About a decade ago, he said, Grant, Eisenhofer and a couple other plaintiffs’ lawyers from different firms put together plans for a fund that would buy shares of companies in deals that, in their view, didn’t deliver fair value to shareholders. They’d then bring appraisal actions. The fund, Grant said, was to be named for Eisenhofer’s hometown, Merion, Pennsylvania.
Grant said the group went so far as to obtain an ethics opinion that Grant & Eisenhofer could represent the fund. But he said he and Eisenhofer pulled out when two Chancery Court judges told Grant they weren’t comfortable with the idea of him and Eisenhofer effectively acting as both client and lawyer. “That was the end of Merion,” Grant said. “It still existed, but was defunct.”
Of course, Merion sparked back to life in a roaring fashion in 2009 under former plaintiffs’ lawyer Andrew Barroway. Grant & Eisenhofer represented Merion and other hedge funds in the heyday of appraisal arbitrage, when Delaware’s generous statutory interest rate and tradition of awarding challenging shareholders no less than the deal price made appraisal an almost no-lose proposition.
Private equity funds despised appraisal arbitrage, Grant said, and began an intense lobbying campaign to get lawmakers and judges to end it. “All the PE firms start clamoring, there are not going to be any more deals unless you get rid of appraisal and they start clamoring, we’re not going to offer as much money because we have to hold something back because of appraisal,” Grant said. “It was a three-year, four-year drumbeat of, we’re going to move out of Delaware, we’re not going to buy in Delaware, we’re not going to deals anymore, we’re going to spend less money on deals, people aren’t going to get their fair shake.”
In retrospect, Grant said, the turning point for appraisal litigation was his 2017 Petsmart case. Grant’s hedge fund clients contended that the fair value of Petsmart shares was nearly $129 per share – not the $83 acquisition price by a consortium of private equity investors. To this day, Grant believes the overwhelming weight of evidence favored his side. But Vice-Chancellor Joseph Slights concluded the company was worth what the PE consortium agreed to pay – a ruling Grant considers his biggest-ever litigation defeat.
“That was sort of probably the canary in the coal mine,” he said. “We could never understand, what drove (Vice-Chancellor Slights) when he weighed the evidence, to choose what clearly appeared to everyone to be minority evidence. Now, in hindsight, the idea was that we just really don’t like appraisals, particularly appraisals where there has been any kind of process and multiple bidders.”
Rulings after Petsmart have made appraisal an increasingly unattractive bet for hedge funds, which is one of the reasons why Merion is now partnering with Bench Walk to find other investments. Grant said he’s still simmering that Delaware judges killed off litigation that required shareholders to put up their own money to test deal integrity.
As the Securities and Exchange Commission mulls the idea of allowing corporations to impose mandatory arbitration on shareholders, Grant offered a unique take: Plaintiffs’ firms might actually make more money in a mandatory arbitration regime.
“We know it’s really bad for our clients. We’re not sure how it affects the law firms,” he said. Here’s why. To benefit from a securities class action, most investors, including big investors, don’t have to do anything at all. As long as one lead plaintiff shows up to prosecute the case, every investor reaps the benefits. That wouldn’t be true if corporations had shareholder arbitration that required every investor to bring an individual proceeding. Grant said large investment funds that have sat out securities class actions could well be forced to bring individual arbitration proceedings if there’s no other avenue to prosecute fraud claims. That’s a business opportunity for plaintiffs’ firms – arbitration for one client at a time is cheaper, faster and less risky than acting as lead counsel in a class action.
“You do some limited discovery, it costs me half a million bucks and one year to get to trial instead of ten million bucks and seven years. That’s a really nice investment for this law firm to say, ‘Okay, we’ll take those,’” Grant said. “Jay and I talk about this on a regular basis as we look out one, two, three years about this. Do we want to get everyone up in arms about this? Well, it sucks for the investors but you know, that may be their worry. That’s why they have the Council of Institutional Investors. But if they do this, it may actually be very good for the economics of Grant & Eisenhofer.”
Grant told me one of his proudest accomplishments has been raising expectations about shareholders’ lawyers. “I feel good to the extent that we have been able to legitimize going the plaintiffs’ route as a career path,” he said. “You go to law school, you’re taught big firm, big firm, big firm. You go to the big firm and there’s this very condescending view of the plaintiffs’ side, even when you’re representing big institutions. I think we’ve forced recognition that, wait a minute, you can do it right, you can represent big, real clients and that is an alternative.” Grant said he’s leaving behind a firm filled with lawyers he’s trained to be good litigators.
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