Sunday, January 24, 2010

The class-action lawyers don't get credit

A New York state court, in rejecting plaintiffs' attorneys' efforts to cadge themselves some fees out of JP Morgan Chase, have provided us all with an opportunity to walk down memory lane and review the shotgun marriage of JPM and Bear Stearns almost two years ago now.

On Sunday evening, March 16, 2008, in the face of a run on Bear Stearns, the board of that storied broker-dealer agreed under Federal Reserve pressure to a "stabilizing transaction" in which it would disappear as an independent entity. It was to be effectively acquired by JPM for $2 a share. When I first saw that figure, I thought it was a type. Surely what was meant was $20. It couldn't possibly be only $2, thought I (and several other observers, some considerably more canny than I). After all, the stock had closed at $30 a share at the end of business Friday. Surely, it couldn't have lost $28 of that value of the course of a not-quite-concluded weekend, could it?

But it wasn't a typo. The agreement was that Bear Stearns would sell itself for $2 a share. Naturally, what came as a shock to onlookers like myself came as a much uglier shock to folks who had a substantial chunk of their nest eggs in Bear Stearns stock. And plaintiffs' attorneys filed a lawsuit on their behalf almost immediately, In Re Bear Stearns, 21 Misc. 3d 447 (Sup Ct., New York County 2008), claiming that the directors had violated their fiduciary duty by low-balling this.

On Tuesday, (as the usual story goes) lawyers for JPM discovered flaws in the hastily-compiled documentation they had prepared for this deal. They discovered language that "inadvertently" would require JPM to be responsible as a backstop for Bears' deals even if the deal didn't close. In other words, even after signing of to the $2, Bears' execs and lawyers discovered that the wording left them with a neat blackmail weapon. They could breach the contract, file bankruptcy as an independent entity, and leave JPM stuck dealing with a variety of angry counter-parties.

It was in reaction to that threat, and a promise to change the disturbing language about backstopping deals, that JPM agreed reluctantly a week later to raise the $2 price to a munificent $10. So, everybody was playing hardball all around. You might ask: so what?

The amusing point here is that the class action lawyers sought to take credit for this twist in fate. They said: because we filed the lawsuit, the defendants decided they had to be better fiduciaries, so they pressed for the increase from $2 to $10. Accordingly, we provided great assistance to the class we represented, and we are entitled to layers' fees.

Well, the court had earlier decided against the plaintiffs on the merits: that the directors did the best they could be expected to in the crisis circumstances they faced. This brings us back to where we started. On Dec. 28, 2009, the court also ruled against the lawyers on the issue of fees. "Here, there is not an iota of evidence in the record to suggest that the shareholder suits filed by plaintiffs after the announcement of the Initial Merger Agreement, had any causal impact on the negotiations that eventually resulted in the Amended Merger Agreement."

A bit more on this tomorrow.

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