Double Trouble: Collateral Shareholder Litigation Following Foreign Corrupt Practices Act Investigations
Washburn University School of Law
Ohio State Law Journal, Vol. 73, No. 5, p. 1217, 2012
A recent surge in government enforcement of the U.S. Foreign Corrupt Practices Act (FCPA) has increased opportunities for private plaintiffs to bring collateral civil actions. In response to FCPA investigations, shareholders now routinely file derivative suits, securities fraud class actions, or both. Collateral shareholder lawsuits may allege, for example, that the directors violated their fiduciary duties by failing to oversee the company and avoid or detect the FCPA violation or that the company misled shareholders by not disclosing the conditions that led to the violation. To date, FCPA-based shareholder litigation has enjoyed limited success, with many actions dismissed at early stages of the lawsuits. Nevertheless, a number of the suits have been settled, some for amounts exceeding the government penalties paid by the company for the FCPA violations.
Shareholder litigation based on company behavior that violates the FCPA is significant for several reasons. In the FCPA context, the threat of private litigation increases the impact of an FCPA violation by increasing a company’s liability. Moreover, parallel shareholder litigation may also subtly expand FCPA liability by functioning as an FCPA private right of action.
FCPA-related shareholder lawsuits may also be of more general doctrinal significance. Allegations that directors failed to fulfill their fiduciary duties of oversight may constitute “Caremark claims,” which inform the fundamental duties of corporate managers. Similarly, shareholder allegations of inaccurate books and records and inadequate accounting controls may be brought as securities fraud class action suits based on the company’s misleading disclosure. Both corporation and securities law cases, in the FCPA context, may disturb the uneasy allocation of state and federal regulation of business associations.
This article examines recent shareholder litigation based on company behavior that violates the FCPA. Part II introduces the FCPA and the current surge in its enforcement. Part III examines the increase in shareholder actions based on FCPA violations. Parts IV and V analyze shareholder derivative and securities fraud class action lawsuits, respectively, in terms of what shareholders are alleging and how their suits are faring. Part VI draws preliminary conclusions about the legal consequences of increased collateral shareholder litigation based on FCPA violations.
Number of Pages in PDF File: 36Accepted Paper Series
Date posted: January 30, 2013
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