Shareholder Class Research Articles

The Importance of Being Dismissive: The Efficiency Role of Pleading Stage Evaluation of Shareholder Litigation

It has been claimed that the risk/reward dynamics of shareholder litigation have encouraged quick settlements with substantial attorneys’ fee awards but no payment to shareholders, regardless of the merits of the case. Fee-shifting charter and bylaw provisions may be too blunt a tool to control agency costs associated with excessive shareholder litigation, and are in any event now prohibited by Delaware statute. We claim, however, that active judicial supervision of public company shareholder litigation at an early stage reduces the costs of frivolous litigation to shareholders by separating meritorious from unmeritorious litigation before the full costs of discovery are incurred. Using procedures and doctrines that have not previously been catalogued and appreciated as a coherent set of interrelated dynamics, the Delaware Court of Chancery has relied on the motion to dismiss as the primary procedural vehicle for accomplishing that early stage triage. Such early stage analysis depends upon consideration of essentially undisputed facts, and upon the availability of such facts to the plaintiff shareholder through sources that compensate for the problem of asymmetric access to relevant information. The motion to dismiss in representative shareholder litigation has thus come to resemble, and substitute for, the motion for summary judgment. The Delaware courts’ atypical demand for, and unusual willingness to consider, extensive facts in resolving motions to dismiss encourage defendants to supply relevant information voluntarily, on a cost efficient basis that avoids largely unlimited discovery. Where time constraints preclude disposition via a motion to dismiss, the motion for expedited discovery must necessarily come to serve the same efficiency promoting functions as the motion to dismiss, and the Court of Chancery has come to apply essentially the same level of substantive factual review of the merits encountered in resolving motions to dismiss. The result is a system in which cases are dismissed or settle at the motion to dismiss stage: from 2011 through 2014, for example, there were only four public company shareholder class or derivative suits in which the Court of Chancery resolved the case after trial. With the likely concentration of deal litigation in the Delaware courts resulting from increasingly prevalent exclusive forum charter and bylaw provisions, the motion to dismiss and the motion to expedite discovery are likely to become even more important in promoting the efficient conduct of shareholder class and derivative litigation involving public companies.

Proxy Advisors and Shareholder Engagement Evidence from Italian Say-on-Pay

Institutional investors are often criticized for their insufficient "engagement" with listed companies. Actually, information and other transaction costs limit their capacity to actively monitor investee firms, and to engage with their management. A partial solution is offered by Proxy Advisors (PAs), providing proxy voting services on a subscription basis. We use Say-On-Pay (SOP) in Italian listed firms to investigate PA activity and (institutional) shareholder voting behavior. Making use of a unique dataset, including information on how each shareholder voted in 2012, we analyze the behavior of different classes of shareholders and their relation with PA recommendations. Our main results can be summarized as follows: i) while shareholder dissent on SOP is low, in line with what happens in other developed countries, dissent by institutional investors is surprisingly high; ii) the voting behavior of institutional investors is strongly correlated with PA recommendations. The influence of PAs is higher on nonblockholders (mostly internationally diversified pension and mutual funds) than on blockholders; iii) preliminary estimates show that the influence of PAs in Italy is at least as strong as (and probably stronger than) that observed in the US. This is coherent with the weight of non-domestic institutions, which can be hardly expected to independently analyze thousands of firms; and it is especially so in Italy, where most listed firms may be classified as small/medium cap firms on a comparative basis; iv) institutional investors, however, do not take PA recommendations at face value, but focus on the specific reasons of concern underlined in the reports (in particular, on the structure and long-term value creation of the remuneration policy). Severance pay has, by far, the largest impact.

Quantifying executive threats: shareholder litigation

Threats confronting directors and officers of publicly traded companies are among the least understood dimensions of operational risk, all while the key manifestation of those threats - shareholder class action (SCA) litigation - counts among the most economically and reputationally damaging risks. The goal of the research outlined here is to offer a general overview of SCA as a key expression of executive threat, with a particular emphasis on one of the key root cause of those suits: accounting restatements. Representing corrections of, or amendments to earlier disclosed company performance details, restatements are recast in a more informationally-revealing context of 'restatement-type-materiality' conjoint, which yields a deeper theoretical understanding of conditions under which corrections of earlier released management disclosures can lead to significant heightening of executive risk. Also discussed is a general outline of a multi-attribute exposure assessment approach, which amalgamates multiple risk heightening proxies into a single evaluative framework.

The real effects of corporate fraud: evidence from class action lawsuits

AbstractUsing a sample of lawsuit firms from 1996 to 2009, this study examines whether fraud revelation through shareholder class action affects corporate financing and investment policies. We predict that revelation of fraud damages defendant firms' reputation and undermines credibility of their financial disclosure. As a result, such firms experience difficulty in financing and reduce investment accordingly. Consistent with our prediction, we find that fraud‐committing firms experience a decline in total financing (total investment) by 1.5 per cent (0.8 per cent) of total assets after fraud revelation. Difference‐in‐differences analyses reinforce our main findings. The impact is more pronounced for firms with lower inherent fraud incidence.

Zealous Advocates or Self-Interested Actors? Assessing the Value of Plaintiffss Law Firms in Merger Litigation

Using a hand-collected sample of 1,739 class actions that challenge the fairness of M&A transactions from the period 2003 through 2012, we examine the effectiveness of plaintiffs’ law firms. From out of the 336 law firms in our sample, we determine the top law firms based on their popularity with informed plaintiffs as well as their proven ability to obtain large attorneys’ fees awards. We find that the presence of a top plaintiffs’ law firm is significantly and positively associated with a higher probability of lawsuit success. These results hold even after instrumenting for unobserved case quality, given that top law firms likely can obtain better cases with higher chances of success. This success appears to stem from the fact that top plaintiffs’ law firms are significantly more active in prosecuting cases than other plaintiffs’ law firms: they file more documents in the cases they litigate and they are more likely to bring injunction motions to enjoin a transaction. Defendants are also less likely to file a motion to dismiss cases filed by top plaintiffs’ law firms. Our results inform the debate over shareholder litigation as well as provide courts guidance for selecting lead counsel in shareholder class action litigation.

Independent Directors and Corporate Litigation

In this paper, we examine the effects of board structure on a wide variety of corporate litigation. We use a unique hand-collected dataset of corporate law suits and the 2002 NYSE/NASDAQ exchange listing requirements, as an exogenous shock to board independence, to empirically examine the monitoring effectiveness of board independence using a difference-in-difference framework. We find that an increase in board independence is associated with a significant reduction in multiple types of corporate litigation, beyond shareholder class action lawsuits. While this evidence is consistent with stronger monitoring by independent directors we also find evidence that greater board independence can inhibit a board’s ability to monitor internal actions. Specifically, we find evidence that mandatory increases in board independence, which reduces a board’s knowledge of firm-specific information, can make a firm more susceptible to product liability, employment and labor litigation. The evidence is consistent with the greater monitoring role independent directors provide, but also their limitations when it comes to monitoring in firms where firm-specific information is more important.

Surviving Mauritius: The Continued Vitality of Shareholder Class Actions

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.

Six Degrees of Separation: From Derivative Suits to Shareholder Class Actions

Trans-individual litigation has revolutionized modern law. It has radically altered the manner of assertion and adjudication of legal claims. Beyond concerning a large number of people, the underlying suits operate in a unique fashion. In particular, they call for the constant protection of the interests of the parties on whose behalf the plaintiffs purport to speak.Not surprisingly, corporate law has partaken in this phenomenon. For instance, derivative suits allow individuals to sue for a larger collectivity, somewhat along the lines of the citizen suits established over a century later. Of course, they entertain the claims of the corporation, rather than those of the society as a whole. Likewise, stockholders have deployed the class action, since its inception, to aggregate their claims specifically against the corporate entity or the board of directors.This Article concentrates on derivative suits and shareholder class actions. It ultimately contends that the two procedures resemble each other only superficially and that they diverge from each other on a more profound level. Most significantly, derivative suits aim at the vindication of a genuinely collective and indivisible right, while shareholder class actions seek to enforce an aggregation of individual entitlements. Consequently, these mechanisms also differ in the kind of representation they entail, in the objective they pursue, in how they construct fairness internally, and in how they approach the central problem of adequacy of representation.An appreciation of this dichotomy contributes to an understanding not only of the inner workings of each of these two devices but also of the corporation itself and of the relationship among the corporate entity, the board of directors, the investors, and even the stakeholders. In addition, it suggests a new interpretation of the key distinction, ever-present in the case law, between derivative and direct corporate claims. Accordingly, in order to distinguish the former from the latter, courts should focus, first and foremost, on the nature of the right at stake, following the path delineated in Part IV. At the end of the day, by grasping the difference between derivative suits and shareholder class actions, one gains invaluable insights into group rights generally.

Confronting the Peppercorn Settlement in Merger Litigation: An Empirical Analysis and a Proposal for Reform

Shareholder litigation challenging corporate mergers is ubiquitous, with the likelihood of a shareholder suit exceeding 90%. The value of this litigation, however, is questionable. The vast majority of merger cases settle for nothing more than supplemental disclosures in the merger proxy statement. The attorneys that bring these lawsuits are compensated for their efforts with a court-awarded fee. This leads critics to charge that merger litigation benefits only the lawyers who bring the claims, not the shareholders they represent. In response, defenders of merger litigation argue that the lawsuits serve a useful oversight function and that the improved disclosures that result are beneficial to shareholders.This Article offers a new approach to assessing the value of these claims by empirically testing the relationship between merger litigation and shareholder voting on the merger. If the supplemental disclosures produced by the settlement of merger litigation are valuable, they should affect shareholder voting behavior. Specifically, supplemental disclosures that are, in effect, “compelled” by settlement should produce new and unfavorable information about the merger and lead to a lower percentage of shares voted in favor of it. Applying this hypothesis to a hand-collected sample of 453 large public company mergers from 2005-2012, we find no such effect. We find no significant evidence that disclosure-only settlements affect shareholder voting.These findings warrant a reconsideration of Delaware merger law. Specifically, under current law, supplemental disclosures are viewed by courts as providing a substantial benefit to the shareholder class. In turn, this substantial benefit entitles the plaintiffs’ lawyers to an award of attorneys’ fees. Our evidence suggests that this legal analysis is misguided and that supplemental disclosures do not in fact constitute a substantial benefit. As a result, and in light of the substantial costs generated by public company merger litigation, we argue that courts should reject disclosure settlements as a basis for attorney fee awards.Our approach responds to critiques of merger litigation as excessive and frivolous by reducing the incentive for plaintiffs’ lawyers to bring weak cases, but it would have an additional benefit. Current practice drags state court judges into the task of indirectly promulgating disclosure standards in connection with the approval of fee awards. We argue, instead, for a more efficient specialization between state and federal courts in the regulation of mergers: public company merger disclosure should be policed by the federal securities laws while state corporate law focuses on substantive fairness.

The impact of shareholding structure on firm investment: Evidence from Chinese listed companies

This paper examines the impact of shareholding concentration and the class of shareholders on firm investment. We apply the Euler equation approach to the empirical modeling of investment for a panel dataset of 786 Chinese listed companies during 1998–2004. We find that a significant positive sensitivity of investment to internal funds is associated with firms that have a low level of shareholding concentration, large proportion of state shares and low proportion of publicly-owned shares. We find that cash flow is insignificant for high levels of legal person or public shareholding. We interpret this in the context of the impact of both liquidity constraints and corporate governance issues.

Lockup clauses in Italian IPOs

Virtually all Initial Public Offering (IPO) prospectuses feature lockup provisions that limit pre-IPO shareholders’ share sale for some period of time after negotiations start. The aim of this article is to analyse voluntary lockups in Italy. We show that lockups are considerably longer and heterogeneous compared to the US or European evidences, and their duration and size serve primarily as a commitment device to alleviate the moral hazard problem faced by incumbent shareholders. We document considerable differences in lockup clauses among main shareholder classes, with venture capitalists and outside investors having considerably lower percentages of owned shares restricted for sale and with significantly shorter lockup durations. We also show that abnormal returns around the lockup expiration dates are associated solely with Venture-Capital (VC)-backed IPOs.

Putting Stockholders First, Not the First-Filed Complaint

The prevalence of settlements in class and derivative litigation challenging mergers and acquisitions in which the only payment is to plaintiffs’ attorneys suggests potential systemic dysfunction arising from the increased frequency of parallel litigation in multiple state courts. After examining possible explanations for that dysfunction, and the historical development of doctrines limiting parallel state court litigation — the doctrine of forum non conveniens and the “first-filed” doctrine — this article suggests that those doctrines should be revised to better address shareholder class and derivative litigation. Revisions to the doctrine of forum non conveniens should continue the historical trend, deemphasizing fortuitous and increasingly irrelevant geographic considerations, and should place greater emphasis on voluntary choice of law and the development of precedential guidance by the courts of the state responsible for supplying the chosen law. The “first-filed” rule should be replaced in shareholder representative litigation by meaningful consideration of affected parties’ interests and judicial efficiency.

Shareholder litigation in mergers and acquisitions

Using hand-collected data, we examine the targeting of shareholder class action lawsuits in merger and acquisition (M&A) transactions, and the associations of these lawsuits with offer completion rates and takeover premia. We find that M&A offers subject to shareholder lawsuits are completed at a significantly lower rate than offers not subject to litigation, after controlling for selection bias, different judicial standards, major offer characteristics, M&A financial and legal advisor reputations as well as industry and year fixed effects. M&A offers subject to shareholder lawsuits have significantly higher takeover premia in completed deals, after controlling for the same factors. Economically, the expected rise in takeover premia more than offsets the fall in the probability of deal completion, resulting in a positive expected gain to target shareholders. However, in general, target stock price reactions to bid announcements do not appear to fully anticipate the positive expected gain from potential litigation. We find that during a merger wave characterized by friendly single-bidder offers, shareholder litigation substitutes for the presence of a rival bidder by policing low-ball bids and forcing offer price improvement by the bidder.

Cross-Border Shareholder Class Actions Before and after Morrison

We conduct an empirical inquiry into the effect of the Supreme Court's 2010 Morrison decision, which limited the reach of US securities laws to trades occurring on US markets, on the competitiveness of US markets as a venue for listings by foreign issuers and trading in cross-listed stocks. In the wake of the Morrison decision, the Dodd-Frank Act requires that the SEC inform Congress about the merits of creating a new extraterritorial right of action. We provide input into the debate by using data on 329 shareholder class actions filed against foreign-domiciled companies and discussing the effects of such a right on the competitiveness of U.S. capital markets. We conclude that, following Morrison, foreign companies’ expected litigation costs should fall, because investors who purchased their shares on overseas exchanges will be excluded from classes. By reducing expected litigation costs, Morrison eases a deterrent to US listing by foreign issuers and thereby makers the US a more competitive venue for cross-listings, as well as for the volume in cross-listed stocks.

Internal and external discipline following securities class actions

Companies are sometimes accused of misleading the market. The SEC can punish this with enforcement actions. Alternatively, shareholders can seek redress through a shareholder class action (SCA). While some literature has examined SEC actions, it has not examined SCAs, and has not examined external discipline and the managers's future employment prospects after either action. Thus, using a sample of 416 securities class actions, this paper shows that SCAs are a catalyst to promote disciplinary takeovers, CEO/CFO turnover and CEO/CFO pay-cuts, and harm CEOs future job-prospects. This suggests that even if the law governing SCAs is sub-optimal, they can still induce internal and external discipline.

Lockup Clauses in Italian IPOs

Virtually all IPO prospectuses feature lockup provisions that limit pre-IPO shareholders’ share sales for some period of time after negotiations start. The aim of the paper is to analyze in-depth voluntary lockups in the Italian setting and to draw conclusions about their effect both on different shareholder classes and on share prices. We show that the lockups are considerably longer and heterogeneous than US or European evidence shows, and their duration and size serves primarily as a commitment device to alleviate the moral hazard problem faced by the incumbent shareholders. We show that abnormal returns around the lockup expiration dates are associated solely with venture-capital backed IPOs.

Revisiting Shareholder Activism at AGMs: Voting Determinants of Large and Small Shareholders

Using a sample of voting turnouts of annual general meetings of European companies, we document that shareholder voting turnouts are significantly different according to the ownership structure of the company. Different types of shareholder classes show different voting engagements according to the ownership concentration and the ownership structure. The number of directors that stand up for (re)election positively influences voting turnouts. Special resolutions like changes of the articles of associations have no major impact on shareholders’ engagements. Corporate performance and other governance mechanisms do not change shareholder activism measured as voting turnout. These results provide important benchmarks for the current debate of shareholder empowerment. The agenda and hence the role of shareholders should be restructured. The AGM should be used as a strategic governance tool for director elections while the central decision making body should be the board, balancing shareholder primacy with board primacy.

Shareholder Class Action Suits and the Bond Market

Using a sample of 2,241 shareholder lawsuits from 1996 through 2008, we identify 579 lawsuit firms (26%) with publicly traded bonds. We find a mean [median] excess bond return of -2.59% [-1.83%], and a significant increase in trading volume for these bonds around the class action filing date. The excess bond returns are more negative for more risky bonds, when the ex ante merits of the lawsuit are higher, when a debtholder is a co-plaintiff, and when the complaint has a debt allegation. We also examine the relationship between bondholder and shareholder returns. We find no evidence of an expropriation of wealth between claimants. We do find that the bond market incorporates the negative news leading up to and encompassing the filing date more quickly than the stock market. We attribute this result to the bond market being traded primarily by institutional investors.

F3: Securities class actions around the world after Morrison

Institutional investors globally are increasingly recognising the need to monitor and respond to the now many different securities class action and group investor action systems around the world, to recoup investment losses arising from corporate (or adviser) non-disclosure, misrepresentation or fraud. Securities class actions started in the United States, still in volume terms the main home of class actions, but have spread quite rapidly to other jurisdictions around the world. The US Supreme Court's Morrison decision in 2010 that sought to exclude so-called ‘foreign-cubed’ investors from US cases has accelerated the export of the class action style process to other jurisdictions and increased shareholder class action activity outside the United States. Whereas the US class action process is somewhat familiar (at least to some investors), the variety of processes outside the United States is less well known and the landscape continues to change rapidly. This article looks at some of the selected non-US jurisdictions to give a brief introduction to the new evolving global class action landscape.

Valuing intellectual capital of innovative start‐ups

PurposeThe main purpose of this study is to contribute to the theory of intellectual capital (IC) with the new IC valuation method based on the economic value added (EVA®) concept as well as to present the Innovation Funnel, which is a useful management method and tool from which companies would benefit.Design/methodology/approachThe paper first explains the links and differences between IC and intellectual assets (IAs) and aims at improving the reader's understanding of the share of the two classes of shareholders, monetary capital investors and intellectual capital investors, of the innovative start‐ups. The paper provides practical guidance for use in IC valuation and financial management of innovation rather than a theoretical framework, and is based on the literature on innovation, IC, corporate finance as well as the practical experience of a few early stage venture capitals with whom the author cooperates.FindingsThe findings show a way of calculating fair share of an innovative company's shareholdings. The method reflects the risk adjusted future value of cash invested by monetary capital investors and a real market value of IC contributed by the founders. The paper also presents a method of financial management of innovation projects.Research limitations/implicationsThe presented methods focus on creating shareholder value and on financial aspects of IC rather than on IC indicators and their graphical representation, hence, members of the IC community who seek more practical concepts may be more interested in the paper.Originality/valueThe paper proposes a practical perspective on the method for IC valuation, innovation projects' financial management, as well as fair division of a start‐up shares between intellectual and monetary capital investors that would be useful for venture capital officers, innovative companies founders and R&D centers' managers.