By Covering Business July 12, 2013
By Gabe Friedman
Columbia Journalism School, C’13
June was a busy month for shareholder litigation. Investors in Dole Foods sued the company’s board of directors in an effort to block a buyout by the CEO, or at least sweeten his offer. Investors in BP asked a federal court for permission to sue the company in a class action related to the 2010 Gulf oil spill. And Google settled a class action suit with its shareholders over how management plans to retain control over the company.
Although each case represents a different type of suit, they are all alike in at least one regard: shareholders are suing the management of a company they invested in. Hundreds of shareholder lawsuits are filed each year, and many make for fascinating stories.
Shareholder litigation falls into three main categories: securities fraud class action lawsuits, derivative lawsuits and merger litigation. These suits may be filed in different courthouses and seek different types of damages and relief, but in each one, the underlying dispute involves the company’s disclosures.
Most shareholder lawsuits end with settlements rather than a trial, but the details of the settlement and the money it costs to litigate can be significant.
Here’s a closer look at the three main types of shareholder suits.
The Securities Fraud Class Action may be the most well-known type of shareholder litigation. In the BP suit, for example, investors allege BP misled investors when it proclaimed itself safety-oriented while looking to cut safety budgets. Whether this amounts to a fraud is for BP investors to prove.
Investors allege BP’s share price tumbled about 40 percent after the disastrous oil rig explosion, which wiped out billions of dollars in shareholder value. These are the damages that investors in a securities fraud class action typically seek to prove. (For a wider discussion of damages, see Cornerstone Research’s semi-annual study on the number of suits filed.)
The damages in such cases can be huge. After Enron failed in 2001, its investors spent years suing the company’s executives and board, accountants, bankers and others, amassing $7.2 billion in settlements by 2008, one of the largest sums in the history of U.S. litigation.
Securities fraud class actions – sometimes called 10b-5 suits, after the rule that allows private investors to sue – have been targeted by Congress in multiple tort reform laws. These cases are always filed in federal court and can be researched on PACER, an online database of federal court records. Charges to download documents can be partially offset by joining a file-sharing community known as Recap that requires adding a plug-in to your web browser.
The immediate impact of a shareholder suit may be limited, so ask some questions to determine whether it’s important. Is the plaintiff an individual or a giant pension with millions of members? A lawyer with ample resources is likely to advance further against a corporation. Ask the company if it’s putting aside any money for a settlement. Or comb the court documents for internal company e-mails that might make a good story.
A derivative suit allows shareholders to sue management, or a third party, on behalf of the company. Any damages recovered go to the company, not the shareholders.
Imagine a company announces an accounting error. A shareholder derivative suit may first allege the error amounts to fraud, and then allege the current management team is too conflicted to address the root of the fraud.
These cases can be filed in state or federal court. Some state courts provide access to documents on their web sites, while others offer only a schedule of future hearings.
Derivative settlements generally result in smaller monetary settlements but there may be important corporate governance reforms. An executive may lose his job, the board may add an independent director or it may revise its general bylaws to avoid future accounting errors.
In one of the largest derivative settlements, Oracle CEO Larry Ellison agreed in 2005 to make $100 million in charitable donations and to pay plaintiffs lawyers $22 million. The suit had centered around an $894 million gain Ellison made from stock sales just before Oracle announced it had missed an earnings target.
There is a third type of shareholder lawsuit, such as the one in which Dole Foods shareholders allege the CEO is low-balling investors with his buyout offer. The stakes are high in all suits seeking to stop a merger or raise a buyout price because the longer it drags on, the greater the chances are for the deal to fall apart.
It is not unusual to find this type of lawsuit filed in Delaware’s business or chancery court because an estimated 60 percent of all Fortune 500 companies are registered there.
If a shareholder lawsuit looks too complicated, find a law professor with expertise in securities litigation, business or corporate law, who can help sort it out.
Most cases settle around pressure points, such as a hearing on a motion to dismiss or summary judgment on the eve of trial. The case against Google, which revolved around how a new class of shares should be valued, settled one week before trial, just as speculation mounted that the co-founders would testify.
Make sure to monitor a company’s disclosures through the SEC’s EDGAR database to stay alert to a settlement or other pertinent information that may not show up in court documents.
There are plenty of post-settlement stories to write. Comb the settlement documents to find out how much the lawyers were paid. Ask the company if it footed the bill or its insurance company paid. Check the impact of any corporate governance reforms down the road. The stakes are usually high in securities litigation. Just find an angle.
