Public Ownership, Firm Governance, and Litigation Risk

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.