Makes Sense to Me

I have always thought the logic of shareholder law suits were crazy to start with, and even crazier given that shareholder suits over loss of stock value tend to result in ... declining stock value.

I have never been able to justify most lawsuits by shareholders
against companies in which they own shares.  Any successful verdict
would effectively come out of the pockets of the company's owners who
are.. the shareholders.  So in effect, shareholders are suing
themselves, and, win or lose, they as a group end up with less than if
the suit had never been started, since a good chunk of the payout goes
to the lawyers.  The only way these suits make financial sense (except
to the lawyers, like Bill Lerach) is if only a small subset of the
shareholders participate, and then these are just vehicles for
transferring money from half the shareholders to the other half, or in
other words from one wronged party that does not engage in litigation
to another wronged party who are aggressively litigious.  Is there
really justice here?

OK, you could argue that many of these shareholders are not suing
themselves, because they are past shareholders that dumped their stock
at a loss.  But given these facts, these suits are even less fair.  If
these suits are often made by past shareholders who held stock at the
time certain wrongs were committed, they are paid by current and future
shareholders, who may well have not even owned the company at the time
of the abuses, and may in fact be participating in cleaning the company
up.  So their argument is that because the company was run unethically
when I owned it, I am going to sue the people who bought it from me and
cleaned it up for my damages?  Though it never happens, the more fair
approach would be for current shareholders to sue past shareholders for
the mess they left.

Tom Kirkendall quotes a related notion from the Economist:

This suggests to The Economist the need for a new Apple rule
to guide prosecutors"”at least in cases, such as backdating, where the
main supposed victim is a company's shareholders. Our rule: if a
criminal prosecution is likely to hurt a company's share price, then
don't prosecute.

Are we serious? Well, we think it's worth a discussion . . .
Cost-benefit analysis is largely absent from America's approach to
regulating business wrongdoing, not only in criminal prosecutions, and
that is probably one of the main reasons why America's capital markets
are indeed losing their competitive edge. At the very least,
encouraging the Department of Justice and the Securities and Exchange
Commission to employ a few less lawyers and a few more economists would
be a step in the right direction.


  1. Garble:

    Can the shareholders sue the management team that's running the company and the board of directors personally?

  2. Bill:

    I guess I don't see why shareholder suits don't make sense. You own part of a company when you own stock. That company is run by other people, who owe you a duty to use due care in their actions as employees to you, who are an owner. The board of a company, in addition to owing you the duty of due care as the owner, owes a fiduciary duty to you as the owner, because they are tasked with managing something you own for your benefit, and they are being compensated for it.

    A coroporation can only act through its employees, so when its employees act improperly, the company is acting improperly. When someone acts improperly towards you and causes you damage, you sue who or whatever acted improperly. (You could also try to sue people individually, expecially if they breached their fiducuary duty to you. However this is a lot harder to prove than mere negligence, and the people aren't as rich as the company.) Whether or not people think its "fair" is a completely moral and subjective opinion.

    That you are suing something you have an ownership interest in makes no difference, you can sue the government, which you also have an ownership interest in, or you can sue Coca Cola if their truck runs you over, even if you own Coca Cola stock. The bottom line is somebody injured you or your property rights, and you can be compensated.

    It must makes some sense to people other than the lawyers, or else why would poeple do it? The plaintiffs are acting in their own self-interest, and enforcing their rights as oppossed to waiting for the government to rescue them for their investment choices. If a jury finds that the owner's wrongful acts are worse than those of the employees or the board, then the shareholders won't be able to recover. Most likely it will settle, because litigation is expensive. However, that is the cost of having well-defined property rights and a system to enforce them.