A Theory of Representative Shareholder Suits and Its Application to Multijurisdictional Litigation

Article excerpt

ABSTRACT-We develop a theory to explain the uses and abuses of representative shareholder litigation based on its two most important underlying characteristics: the multiple sources of the legal rights being redressed (creating dynamic opportunities for arbitrage) and the ability of multiple shareholders to seek to represent the collective group in such litigation (creating increased risk of litigation agency costs by those representatives and their attorneys). Placed against the backdrop of controlling managerial agency costs, our theory predicts that: (1) the relative strength of the different forms of shareholder litigation will shiftover time, (2) these shifts can result in new avenues for the shareholders to express litigation power, (3) new agents will emerge to act on shareholders' behalf when these shifts occur (or old agents will put on new hats), and (4) a new set of principal-agent costs resulting from litigation will arise out of these new relationships, leading to recurrent questions about how to best control these costs in particular contexts. Applying our theory to recent academic and practitioner claims of abusive multijurisdictional forum shopping in representative corporate litigation, we conclude that these claims are both overstated and misdirected. Instead, we find a significant amount of what we call "fee distribution litigation." In these cases, multijurisdictional suits are filed by plaintiffs' law firms largely to obtain a slice of the total pool of plaintiffs' attorneys' fees that are paid in a global settlement in one of these cases. We show that fee distribution litigation is quite different than traditional forum shopping and requires a different policy response. We then consider various approaches and conclude that, while no one of them is perfect, judicial comity is the best and least costly option.

INTRODUCTION

In an ancient Indian fable, six blind men touch an elephant to try to understand what it is. Each of them feels a different part of the animal and says what he thinks the elephant looks like based on what he has felt; since they each touch a different segment of the elephant, their descriptions are so different that they cannot possibly be describing the same thing. In one version of the story, the rajah then explains to them that they are all right because the elephant has all of the features that they have mentioned, but that "you must put all the parts together to find out what an elephant is like."1

Research on different aspects of shareholder litigation reflects a similar pattern. Many scholars have studied particular aspects of such litigation and the costs associated with that piece, but invariably without taking into account other pieces. Each is right, but only about the piece being described. For example, recent literature on shareholder litigation includes articles about derivative suits in federal courts,2 class action litigation in state courts,3 and competition between courts,4 none of which fully takes into account findings in adjacent areas.5 To be truly effective, however, corporate law scholarship needs to give a picture of the whole beast and not just some of its parts.

In this Article, we begin by briefly revisiting the important role of shareholder litigation in controlling opportunistic managerial behavior and reducing managerial agency costs. With this background, we develop a theory of shareholder litigation occurring in corporate and securities laws, and describe how it changes over time. We then apply our theory to analyze multijurisdictional litigation in shareholder lawsuits to explain that phenomenon and the concerns it raises. Finally, we propose possible policy solutions addressing those concerns.

Our theory is based on two core characteristics that shape shareholder litigation. First, shareholders' power to sue, along with their related powers to vote and sell, derive from different national and state laws, which create multiple sources for the substantive legal rules. …