Many shareholder lawsuits are ineffective, pointless
NEW YORK » Suing. It's the American way.
When it comes to shareholder lawsuits, it may be time to reconsider. Class-action shareholder suits remain a popular fixture in courts throughout the land, although they very rarely pay shareholders much of anything. Nor are they a stellar way to change a company's bad behavior.
Some might argue the lawsuits serve as a deterrent to bad behavior. That's a hard sell: Because there are so many lawsuits, they carry little stigma. That shareholder suits will almost immediately follow a company's bad news is now a matter of custom. In the last few weeks, shareholders sued H&R Block Inc., Northfield Laboratories Inc. and Bausch & Lomb Inc., to name just a few.
There were 182 federal securities fraud class actions in 2005, according to the Stanford Law School Securities Class Action Litigation Clearinghouse, which keeps numbers in cooperation with Cornerstone Research.
The suits are hardly a path to riches for shareholders. Consider Milberg Weiss Bershad Hynes & Lerach, the law firm that was lead or co-lead plaintiff in more than 50 percent of federal shareholder suits settled from 1997 to 2004.
The firm's median settlement as a percentage of the estimated damages in each case was 3.7 percent, according to Cornerstone. Other firms didn't do much better: The median for the top 10 firms was also 3.8 percent.
So, if you lost $10,000 when your stock declined and you proceeded to join a class-action shepherded into federal court by the biggest names in the field, you might get a whopping $380 when the case was settled.
Except you won't.
The lawyers customarily take one-third of the settlement.
And who pays for the settlement? Maybe the company's insurer, so the company's rates go up, cutting into profits.
Or maybe the company itself pays. That would be a vindication, unless you still own the stock, in which case, "You may be suing yourself, in a sense," said Cindy Ma, vice president of National Economic Research Associates Inc., an economic consulting firm that studies shareholder suits.
Stanford just counts the federal suits. Another wave of suits can hit companies in state court. Do shareholders do better there?
Robert B. Thompson and Randall S. Thomas, both law professors at Vanderbilt University Law School, studied 1,000 corporate fiduciary duty cases filed in Delaware state court between 1999 and 2000. Because of its laws favorable to business, Delaware is a popular state for companies to incorporate in.
Of all the litigation at the state level, "the only real dollar recovery occurs in one subset: cases against controlling shareholders who squeeze out the public shareholders at too low a price," Thompson said.
Even those cases have a lottery-like element to them. Litigation is brought in about 150 such cases a year; cash recovery occurs about 20 percent of the time. Still, the settlements in these cases count for roughly 80 percent of all state-court corporate law settlements.
As Cindy Ma sees it, "There has to be a better way to prevent fraudulent activity."