How Shareholder Litigations Deter Directors and Officers: U.S. and Italy, a Comparative Analysis

Abstract

This paper focuses on the issue of whether shareholder litigations brought in the U.S. - namely, derivative suits and securities class actions - and their equivalent in the Italian law system, achieve their principal regulatory goal of deterring corporate directors and officers from engaging in unlawful conduct, in addition to compensating shareholders and investors for the harm they suffered.

In the U.S., effective derivative suits and securities class actions, contingency fees, and the rule concerning legal expenses, create an entrepreneurial system in which directors and officers are ultimately deterred by the private enforcement of the law. Nevertheless, the presence of other interests not aligned with the public interest in optimal deterrence causes the deterrence effect to suffer peculiar distortions. Indemnification agreements and D&O liability insurance deeply shape the remaining deterrence effect, in particular, D&O liability insurance shifts the risk of losses to a third party that fails to reintroduce it. This paper analyzes possible solutions to this problem that have been receiving scholarly attention.

With regard to the Italian legal system, this paper stresses the causes behind the ineffectiveness of the Italian private enforcement system of corporate laws and analyses what solution, if any, may be adopted. The lack of economic incentives for the plaintiff shareholder, the absence of discovery rules and the difficulty of accessing useful information to be used in litigation, impair the effectiveness of the enforcement system and with it the deterrence goal. Lastly, this paper addresses how differing social landscapes and judicial attitudes also play a role in the deterrence effect within the two legal systems.

Keywords: deterrence, insurance, litigation, Italy, securities, corporate law, comparative, liability, corporate governance, settlement

JEL Classification: G22, G30, K13, K22, K41, K13