Surviving Mauritius: The Continued Vitality of Shareholder Class Actions

Abstract

Class actions are facing extinction. As one scholar has colorfully written, “the mass tort class action has met a similar fate to that of the Dodo bird...last seen on the island of Mauritius in 1680,” predicting soon all other contract-based class actions will also be on their way to Mauritius. The question I address is whether the shareholder class action will survive. Corporate boards are attempting to “opt out” of shareholder class action liability by embedding collective action waivers in corporate governance documents, such as the corporation’s charter and bylaws. The waiver is familiar; it has been widely adopted to eliminate most forms of contract-based class actions. Its effectiveness at eliminating consumer and employment class actions has led some to predict a similar fate for shareholder class actions.In the shareholder context, the embedded collective action waiver purports to prevent all of a corporation’s shareholders from bringing securities fraud claims or state acquisition-oriented actions as part of a class. Proponents of this strategy believe that, if enforceable, the enormous expense of bringing a claim will prevent any individual plaintiff from bringing suit due to the relatively small-expected recovery — ultimately leading to the extinction of all shareholder class actions. The effectiveness of the corporate strategy to eliminate the shareholder class action turns on two issues. First, are these provisions enforceable as a matter of law? Second, assuming their enforceability, will corporations actually adopt the waivers in their charters or bylaws? While the detriments of the class action waiver are well documented, most of critics’ concerns center on the consumer and employment contexts because the legality of the collective action waiver in the securities context is unclear. Nonetheless, many academics worry that if the embedded collective action waiver is legally enforceable it will result in the complete extinction of the shareholder class action. Unlike the rest of the scholarship in this area, this Paper will suggest that even if the embedded waiver is legally enforceable, the market will prevent Armageddon for the shareholder class action. This Paper first analyzes the enforceability of embedded collective actions waivers under state and federal law respectively. I predict the embedded waivers will be enforceable under dominant state corporate and contract law. Regardless, the Supreme Court’s sweeping interpretation of the Federal Arbitration Act suggests the liberal federal policy favoring arbitration agreements will enforce the embedded collective action waiver. Finally, I suggest that the waiver’s enforceability will not necessarily result in its adoption. Instead, I predict that shareholders will be effective at preventing many corporations from adopting the provision, saving the shareholder class action from extinction.