Intraportfolio Litigation

28 Pages Posted: 28 Feb 2011 Last revised: 13 Sep 2012

See all articles by Amanda M. Rose

Amanda M. Rose

Vanderbilt University - Law School

Richard Squire

Fordham University School of Law

Date Written: February 25, 2011

Abstract

The modern trend is for investors to diversify. Shareholders who own one S&P 500 firm tend to own many of the others as well. This trend casts doubt on the traditional compensation and deterrence rationales for legal rules that hold corporations liable for the acts of their agents. Today, when A Corp sues B Corp (for breach of contract, theft of trade secrets, or any other legal wrong), many of the same shareholders own both the plaintiff and the defendant. For these shareholders, damages just shift money from one pocket to another, minus of course lawyer fees. We offer here a new rationale for corporate liability in such cases of “intraportfolio litigation.” Although corporae managers are typically rewarded for maximizing firm profits, what shareholders really care about is overall portfolio value. Firm-on-firm lawsuits can reduce principal-agent conflict by assigning intraportfolio costs to the managers responsible for them. Firm-specific financial data thus become a better tool for diversified shareholders to use in motivating and evaluating managers. Not all intraportfolio litigation can be justified on informational grounds, however. For example, securities fraud class actions against corporations lack informational value because the damages awards overstate the intraportfolio harm. Our theory thus provides lawmakers with a framework for distinguishing between value-creating and value-destroying lawsuits among diversified shareholders.

Keywords: vicarious liability, corporate liability, enterprise liability, securities fraud, securities litigation, corporate governance, respondeat superior, indemnification, class action, deterrence, diversification, agency costs

JEL Classification: K22, K41

Suggested Citation

Rose, Amanda M. and Squire, Richard C., Intraportfolio Litigation (February 25, 2011). Northwestern University Law Review, Vol. 105, p. 1679, 2011. Available at SSRN: https://ssrn.com/abstract=1769946

Amanda M. Rose

Vanderbilt University - Law School ( email )

131 21st Avenue South
Nashville, TN 37203-1181
United States

Richard C. Squire (Contact Author)

Fordham University School of Law ( email )

150 West 62nd Street
New York, NY 10023
United States
212-964-1584 (Phone)

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