This article suggests that institutional investors have rational incentives to become more active in the litigation arena, but that the current debate is falsely constrained because it rests on the assumption that institutional investors must participate either by (1) assuming the formal role of lead plaintiff, class representative, or intervenor or, (2) not participating at all. This is a false dichotomy because, as this article demonstrates, institutions have available to them a rich array of flexible, informal, and relatively inexpensive mechanisms by which they can make their views known to litigants and courts alike.
Our hypothesis that institutional investor activism is more likely to flourish through flexible, informal mechanisms is rooted in practical experience gathered in connection with the Institutional Investors' Forum at Stanford Law School, a group that first convened in December of 1994. The Forum is a discussion group at which institutional investors meet to learn about and discuss issues of common concern. This article reports in detail on the institutional investors' role in the Pentium litigation, which consisted simply of writing a detailed letter to plaintiff and defense counsel alike.
Before turning to the specifics of the Forum participants' involvement in the Pentium litigation, this article first reviews academic literature that helps place institutional activism in a broader theoretical context. Section II provides an overview of the economic analysis of class action dynamics that has emerged over approximately the last decade. Section II extends the literature by analyzing in a more textured way the effects that variable claim size and the presence of positive portfolio values will have on the cost-effectiveness of individual monitoring and on other participatory efforts by class members.
Section III begins to place these theoretical observations into a real world setting by examining the formation of the Institutional Investors' Forum at Stanford Law School. This section discusses the initial preparatory meetings of the Forum, the participants' objectives, the types of cases that Forum participants thought might lend themselves to effective institutional activism, and the types of strategies that the participants devised.
Section IV then turns to the Pentium litigation itself. The section describes in some detail the flaw that was discovered in the Pentium chip and how Intel's response to that problem exacerbated the situation the company faced. The section also describes how these events affected Intel's stock price, and describes the allegations lodged against Intel in the ensuing securities class action, derivative litigation and consumer class actions.
Section V describes the Forum participants' evaluation of the Pentium litigation and the strategy they devised to make known their concerns about the merits of the securities class action and the derivative litigation. The section also describes the outcome of those interventions. Section VI briefly describes the Forum participants' assessment of the consumer class actions against Intel. It describes why the institutions decided not to participate actively in those actions, despite concerns about the proposed consumer class action settlement and, more particularly, about Intel's and plaintiffs' class counsel's agreement concerning attorneys' fees. Finally, Section VII describes some of the preliminary lessons learned from the institutions' activities to date and evaluates some of the provisions of the 1995 Reform Act in light of the Forum's experience. Appendix A reproduces a copy of the "Pentium Letter" forwarded by the institutional investors to plaintiff and defense counsel.