Shareholder Litigation: Reexamining The Balance Between Litigation Agency Costs And Management Agency Costs

Overview: Shareholder lawsuits are a principal legal means to control management agency costs in corporations, yet they generate their own agency costs from the attorneys who bring representative litigation. This article discusses key policy question, and one that is central to good corporate governance, has long been how to properly balance the positive management agency reductions from shareholder litigation against the often-maligned litigation agency costs. It also addresses the tradeoff inherent in this debate using our empirical study of shareholder litigation in Delaware. Our data set of all 1000 corporate fiduciary duty cases filed in Delaware in 1999 and 2000 is the largest empirical study of shareholder litigation. One may find that more than 80% of these cases are class actions against public companies challenging one type of director decision - whether or not to participate in a corporate acquisition. By contrast, derivative suits, the traditional shareholder litigation that is the staple of corporate law casebooks, make up only about 14% of all fiduciary duty suits. This article also examines derivative lawsuits from the two-year period, but we find that they do not look much like our acquisition cases (e.g., longer time to file and to settle fewer suits per transaction and more motions). Derivative cases in our database are concentrated in areas where management agency costs seem likely to be high and produce a number of beneficial settlements that are concentrated in duty of loyalty contexts.

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Format: PDF | Size: 492KB | Date: Jan 2003 | Pages: 76