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Accountability and Competition in Securities Class Actions: Why 'Exit' Works Better than 'Voice'

John C. Coffee Jr.

Columbia Law School; European Corporate Governance Institute (ECGI); American Academy of Arts & Sciences

July 2, 2008

Columbia Law and Economics Working Paper No. 329

The rules of "litigation governance" in class actions are diametrically different from the rules of corporate governance, in large part because the former works off an "opt out" rule while the latter employs an "opt in" rule. This results in higher agency costs in the former context. To address this problem, reformers have long favored remedies such as the "lead plaintiff" provision of the Private Securities Litigation Reform Act ("PSLRA"), which in theory give class members a stronger voice. Empirically, however, such "voice-based" reforms appear to have had no more than a modest impact. But an alternative remedy appears to be more promising: "exit-based" reforms that seek to provoke greater competition between class counsel and attorneys soliciting class members to opt out of the class and file individual actions with them in state court. Unnoticed by academics, a major trend towards institutional investors opting out of securities class actions has developed over the past five years. More importantly, these opt outs appear to be recovering per share amounts that are a multiple of the class per share recovery. This development poses a variety of issues that this paper examines: (1) Why do opt outs do better?; (2) Do the opt outs gains come at the expense of those who remain in the class?; (3) Can defendants feasibly restrict opt outs and how should courts respond to such attempts?; (4) Are pension funds and other institutional investors under a fiduciary or ERISA-based duty to opt out?; and (5) Will greater competition produce greater accountability?

Number of Pages in PDF File: 53

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Date posted: March 28, 2008 ; Last revised: July 6, 2008

Suggested Citation

Coffee, John C., Accountability and Competition in Securities Class Actions: Why 'Exit' Works Better than 'Voice' (July 2, 2008). Columbia Law and Economics Working Paper No. 329. Available at SSRN: https://ssrn.com/abstract=1113845 or http://dx.doi.org/10.2139/ssrn.1113845

Contact Information

John C. Coffee Jr. (Contact Author)
Columbia Law School ( email )
435 West 116th Street
New York, NY 10025
United States
212-854-2833 (Phone)
212-854-7946 (Fax)
European Corporate Governance Institute (ECGI)
B-1050 Brussels
American Academy of Arts & Sciences
136 Irving Street
Cambridge, MA 02138
United States
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