A Theory of Representative Shareholder Suits and its Application to Multi-Jurisdictional Litigation

69 Pages Posted: 16 Mar 2012 Last revised: 23 Oct 2012

Randall S. Thomas

Vanderbilt University - Law School; European Corporate Governance Institute (ECGI)

Robert B. Thompson

Georgetown University Law Center

Date Written: March 15, 2012

Abstract

We develop a theory to explain the uses and abuses of representative shareholder litigation based on its two most important underlying characteristics: the multiple sources of the legal rights being redressed (creating dynamic opportunities for arbitrage) and the ability of multiple shareholders to seek to represent the collective group in such litigation (creating increased risk of litigation agency costs by those representatives and their attorneys). Placed against the backdrop of controlling managerial agency costs, our theory predicts that: (1) the relative strength of the different forms of shareholder litigation will shift over time; (2) these shifts can result in new avenues for the expression of shareholder litigation power; (3) new agents will emerge to act on shareholders’ behalf when these shifts occur (or old agents will put on new hats); and (4) a new set of principal-agent costs resulting from litigation will arise out of these new relationships, leading to recurrent questions about how these costs should best be controlled in particular contexts.

Applying our theory to recent academic and practitioner claims of abusive multi-jurisdictional forum shopping in representative corporate litigation, we conclude that these claims are both overstated and misdirected. Instead, we find a significant amount of what we call “fee distribution litigation.” In these cases, multi-jurisdictional suits are filed by plaintiffs’ law firms largely to obtain a slice of the total pool of plaintiffs’ attorneys’ fees that are paid in a global settlement in one of these cases. We show that fee distribution litigation is quite different than traditional forum shopping and requires a different policy response. We then consider various approaches and conclude that, while no one of them is perfect, judicial comity is the best and least costly option.

Keywords: corporations, jurisdictions, economics

Suggested Citation

Thomas, Randall S. and Thompson, Robert B., A Theory of Representative Shareholder Suits and its Application to Multi-Jurisdictional Litigation (March 15, 2012). Northwestern University Law Review, Forthcoming; Vanderbilt Law and Economics Research Paper No. 12-7. Available at SSRN: https://ssrn.com/abstract=2024508

Randall S. Thomas (Contact Author)

Vanderbilt University - Law School ( email )

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

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Robert B. Thompson

Georgetown University Law Center ( email )

600 New Jersey Avenue, NW
Washington, DC 20001
United States
(202) 661-6591 (Phone)

Paper statistics

Downloads
209
Rank
119,589
Abstract Views
1,430