Shareholder Compensation as Dividend

Abstract

This Article questions the prevailing view that securities fraud actions suffer from a circularity problem. Because shareholder plaintiffs are owners of the defendant corporation, it is commonly argued that shareholder compensation is a payment from shareholders to themselves with substantial transaction costs in the form of attorney fees. But shareholder compensation is no more circular than a dividend, which is a cash payment to shareholders from the company they own with substantial transaction costs in the form of taxes. In fact, shareholder compensation is less circular than a dividend because it is a transfer to shareholders who purchased stock when the price was inflated by fraud from those who did not. Shareholder compensation serves an important loss spreading function that is facilitated by the insurance market. Shareholder compensation may also capture some of the benefits of paying dividends, such as signaling and reducing agency costs, though it may do so more effectively if companies could resolve securities fraud actions by paying a preemptive dividend.

Keywords: Securities, 10b-5, circularity, securities fraud, securities regulation, dividends, dividend puzzle, agency costs, signaling