Elite Shareholder Suits Firm’s Nasty Divorce Comes at Tough Time

The messy exit of a group of lawyers from Manhattan’s Bernstein Litowitz comes as the firm known for taking on corporate giants faces new challenges to its business model.

Jeroen van Kwawegen, who is leading the exodus, said Wednesday that he expects to poach more Bernstein Litowitz attorneys to join him at the new firm he launched this week with four former partners. Bernstein Litowitz responded by claiming that van Kwawegen, who led its corporate governance group, was fired for “misconduct.”

The ugly split comes as the firm’s bread and butter—massive shareholder suits involving companies such as Walmart Inc., Paramount Global, Tesla Inc., and Coinbase Global Inc—is under attack from two recent developments. An overhaul of Delaware’s corporate laws, Senate Bill 21, and a federal policy change threaten shareholder firms’ ability to win large class actions and bet-the-company investor suits.

“In the wake of SB21, there’s a lot of concern this side of the business may have to shift,” said University of Colorado law professor Ann Lipton.

New York-founded Bernstein Litowitz Berger & Grossmann is a top player in Delaware’s Chancery Court, long the top venue for corporate legal fights. Its lawyers lead cases on behalf of a wide range of investors, from Walmart shareholders who extracted a $123 million opioid-related settlement to billionaire activist Carl Icahn in a suit challenging Silver Lake’s $13 billion buyout of Endeavor Group Holdings Inc., parent company of WWE and UFC.

Those are the kinds of disputes that Delaware may see much less of, thanks to SB21. The law gives more power to controlling stockholders, restricts shareholder access to the texts and emails of board members, and strengthens their defenses. It was drafted, with help from defense lawyers, after the Chancery Court rejected Elon Musk’s $55.8 billion dollar Tesla pay package in lawsuit led by Bernstein Litowitz and heavy campaigning by private equity interests.

The second blow to shareholder lawyers came in September, when the US Securities and Exchange Commission gave companies the green light to force investors to sign arbitration agreements. The SEC’s policy shift means companies can ban investors from pursuing securities fraud cases as class actions, requiring them to instead file individual demands for arbitration. That would eliminate a powerful tool for lawyers, but could also give them new leverage if they file thousands of arbitration demands.

“Plaintiffs’ firms are absolutely planning for a world in which securities cases have to be brought in individualized arbitration,” said Lipton, who practiced at Bernstein Litowitz earlier in her career. “That’s partially because that may be the world we’re in, but I think it’s also partially because they want to use it as a club to show companies that adopting arbitration clauses will actually make your lives much more miserable.”

The changes have prompted widespread anxiety across the shareholder plaintiffs’ bar about how to retool. Bernstein Litowitz, as one of the most active shareholder firms in Chancery Court, may have the most to lose.

“Part of the reason the Delaware practice at BLBG got so beefed up was because securities cases had become so hard to litigate, and Delaware was more receptive,” Lipton said.

Bernstein Litowitz is leading an ongoing billion-dollar insider trading case alleging Coinbase CEO Brian Armstrong, venture capital titan Marc Andreessen, and other executives dodged huge losses after its public listing by strategically dumping shares worth $2.9 billion. It’s also one of several firms vying to lead the shareholder class action challenging Paramount’s sale to Skydance Media LLC.

“We have full confidence of the continued viability and importance of governance litigation in Delaware—as well as other venues nationally—for the integrity of our capital markets and the protection of shareholders and other investors,” the firm said in a statement.

‘Different Vision’

Van Kwawegen, who worked on the Musk pay case and was part of Bernstein Litowitz’s executive committee, is already taking a chunk of the firm’s corporate governance practice with him. He said Wednesday that he left over a “fundamentally different vision about what the law firm should look like” including its willingness to fight cases all the way through trial.

Van Kwawegen has been an outspoken critic of the new Delaware law.

“This fly-by-night proposal is a license to steal from institutional investors and pension funds, including pensions of teachers, police officers, and firefighters who’ve worked for the common good every single day,” he said in a March LinkedIn post.

Greg Varallo, a veteran litigator and longtime Bernstein Litowitz partner, is leading a suit challenging SB21 that is currently before Delaware’s Supreme Court. Varallo also quarterbacked the Musk case—leading a team that included van Kwawegen—which landed the firm a record $345 million fee currently tied up in an appeal.

Varallo “remains in place as head of BLB&G’s Delaware practice,” the firm said.