Unicorn Shareholder Suits

Abstract

How U.S. companies raise money and grow has fundamentally shifted. The number of public companies has dwindled and large private companies now dominate the corporate landscape, with a ballooning list of private companies valued at more than a billion dollars – the unicorns. Although the landscape has shifted, the law has not. The legal framework was designed for public companies. This Article explores how this gap affects a fundamental shareholder right: the right to sue. Shareholder litigation has been a central way to address fraud in large companies, but almost all available information and analysis is about suits against public companies. This Article reports the results of a much-needed study of shareholder litigation against large private companies, identifying shareholder lawsuits brought from 2015 to 2020 against private companies identified as unicorns as of 2016. The findings dramatically differ from shareholder litigation on the public side, with many fewer suits and no obvious substitute for the federal securities class actions that are typical public-company shareholder suits. The Article analyzes the procedural reasons for the dearth of unicorn shareholder litigation, drawing on characteristics peculiar to private companies: the absence of a market price, contractual shareholders, limited information, and founder-investor-employee dynamics. It concludes by outlining how litigants and courts can use these findings and analysis to promote improved oversight of the large private companies that now dominate the corporate environment.

Keywords: startups,corporations,shareholders,litigation,unicorn,private market,shareholder litigation,fraud,corporate law,private companies

JEL Classification: K00,K2,K22,K20,K4,M13