Academic journal article Vanderbilt Law Review

Introduction: Professor Randall Thomas's Depolarizing and Neutral Approach to Shareholder Rights

Academic journal article Vanderbilt Law Review

Introduction: Professor Randall Thomas's Depolarizing and Neutral Approach to Shareholder Rights

Article excerpt

Like Gaul, corporate law scholarship can be divided into three overflowing buckets: pro-manager, pro-shareholder, and empirical. We classify empirical scholarship as a separate category, in significant part because of Professor Randall Thomas.

In the pre-Thomas era, much of the literature fell into the first two buckets, with empirical researchers deploying data collection and analysis to support their particular bent. Then Professor Thomas emerged as a distinctive empiricist. Throughout his career, he has published scores of pathbreaking studies while maintaining relative neutrality as to the normative implications. He does not deploy data and its analysis to advocate for particular positions, but instead maps the terrain in which policy can then be considered. Thus, Professor Thomas's category of scholarship is the third way-a balanced approach to generating and assessing evidence, without a particular viewpoint.

We focus here on two areas of empirical exploration of the shareholder franchise, shareholder rights to sue and vote, where Professor Thomas has contributed richly and without polemics-as a neutral umpire calling balls and strikes. We show how his work has helped depolarize the division between managerialists and shareholder rights advocates.

I. Shareholder Litigation

No topic in the business sphere touches a raw nerve as sharply and frequently as shareholder litigation. Even though shareholder suits include individual shareholder claims, the focus of concern and complaints is derivative suits and class actions focusing on various forms of alleged breaches of fiduciary duty under state law or fraud claims under the federal securities laws.

Skepticism of shareholder suits, however, precedes the contemporary concern about shareholder deal litigation. The fount of this skepticism is likely not the prevalence of suits, as how can a large number of suits in isolation tell us much about whether they are abusive? Rather, the foundation for distrust of shareholder suits is the poor incentive structure that surrounds all forms of shareholder suits. With the exception of the securities law class action, the suit's plaintiff invariably has too little at stake in shareholder suits to be an adequate monitor of the suit's counsel. Moreover, with such a small ownership interest in the corporation, the plaintiff suffers no observable loss of wealth when the defense cost of the suit visits significant financial burdens on the corporation. And, though in derivative suits there is a requirement that the plaintiff be "adequate," that standard only eliminates the most egregious shareholder from representing the corporation's claim. Furthermore, the well-entrenched contingency fee arrangement encourages entrepreneurial litigation by plaintiff firms who manage and judge their success not on the individual case but on a portfolio of suits. Within such a portfolio there is room for the highpayout, long-shot suit. Finally, under the American Rule, losing a suit only rarely leads to sanctions, so the disciplining force of assigning costs to the loser is absent.

Before Professor Thomas's various studies, there were wide, unchallenged beliefs shaping public policy surrounding shareholder suits. For example, the hearings leading up to the passage of the Private Securities Litigation Reform Act ("PSLRA")1 included testimony that securities class actions were filed, and quickly, after companies experienced a ten percent or greater decline in stock price, regardless of the cause of that decline.2 A frequently cited law journal article questioned whether the merits of such suits mattered, based on a slender sample of suits with various amounts of damages all settling for the same low percentage.3 Professor Roberta Romero skewered derivative suits on the ground that the average settlement in her study was $9 million (with the median being $2 million), and these were characterized as small in light of the size of the firm's assets; she also noted that most settlements included fee awards to the plaintiffs attorney. …

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