Public

Ownership,

Firm Governance,

and

Litigation

Risk

Eric

L.

Talleyt

Many going-private transactions

are

motivated-at

least

ostensibly-by

the

desire

to

escape

the

burdens

and

costs

of

public

ownership.

Although

these

burdens

have

many

purported

manifestations, one commonly

cited

is

the

risk

of

litigation,

which may

be

borne

both

directly

by

the

firm

and/or

its

fiduciaries

or

reflected

in

director

and

officer

insurance

premia

funded

at

company

expense.

An

important

issue

for

the

"litigation risk"

justification

of

privatization

is

whether

alternative

(and

less

expensive)

steps

falling

short

of

going

private-such

as governance

reforms-may

augur

sufficiently

against

litigation

exposure.

In

this

Article,

I

consider

whether,

controlling

for

other

variables

related

to

firm-

specific

attributes, various

measurable

attributes

of

governance

help

to

predict

subsequent

litigation

exposure. Although

there

are

some

governance

features

(such

as

multiple

board

service,

the

presence

of

a

staggered/classified

board,

institutional

investing,

and

the

proactive

adoption

of

a

governance

policy)

that

predict

subsequent

liability

exposure,

most

governance indicia

appear

to

be

of

negligible

predictive

value,

both

statistically

and

economically.

In

light

of

these

findings,

this

Article

discusses

implications

for

both

the

private-equity

market

and

for

corporate/securities

law

more

generally.

INTRODUCTION

Prior

to

its

quasi-hibernation

in

late

2007,

the

private-equity

(PE)

market

rose

to

historically

unprecedented

levels.

From

2002

through

the

third

quarter

of

2007,

the

total

annual

number

of

PE

deals

nearly

doubled,

and the

associated

annual

dollar

value

of PE

deals

approx-

imately

quadrupled.'

Many

privatizations

-particularly during

and

after

the

promulgation of

the

Sarbanes-Oxley

Act

of

20022

(SOX)

and

its

regulatory

progeny-were

concentrated

among

micro-cap

and

small-

t

Professor

of

Law

and

Co-director, Berkeley

Center

in

Law,

Business

and

the

Economy,

UC

Berkeley

School

of

Law;

Robert

B.

and

Candice

J.

Haas

Visiting

Professor

of

Law,

Harvard

Law

School;

Senior Economist

(Adjunct),

RAND Corporation.

Thanks

to

Robert

Bartlett,

Alicia

Davis-Evans,

Todd

Henderson,

Kim

Hogrief,

Arthur

Levitt,

Patrick McGurn,

Nell

Minow,

Maureen

Mulligan,

Adam

Pritchard,

Robert

Revile,

two

anonymous

referees,

and

conference participants

at

The

University of

Chicago

Law School,

University

of

Michi-

gan,

and

the

American

Bar

Association

Tort

Trial

&

Insurance

Practice

Section

for

helpful

comments

and

discussions,

and

to

the

RAND

Corporation

Institution

for

Civil

Justice

for

generous

support.

Many

thanks

as

well

to

the

Corporate

Library

for

granting

me

access

to

their data.

All

errors

are

mine.

I

See

Per

Stromberg, The New

Demography

of

Private

Equity,

in

Anuradha

Gurung

and

Josh

Lerner,

eds,

The

Global

Economic Impact

of

Private

Equity Report

2008

3,

13

figures

1A

and

1B

(World

Economic

Forum

2008),

online

at

httpJ/www.wefonun

org/pdflcgi/pe/FulReport.pdf

(visited

Jan

11,

2009).

2

Sarbanes-Oxley

Act

of

2002,

Pub

L

No

107-204,116

Stat

745,

codified

in

relevant

part

at

15

USC

§

7201

et

seq.