Article

Public Ownership, Firm Governance, and Litigation Risk

Eric L. Talley

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 Reville, two anonymous referees, and conference participants at The University of Chicago Law School, University of Michigan, 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.

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 firmspecific 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.

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