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Litigation Discovery and Corporate Governance: The Missing Story About the 'Genius of American Corporate Law'

116 Pages Posted: 26 Mar 2013 Last revised: 4 Dec 2014

Érica Gorga

Yale University - Center for the Study of Corporate Law; São Paulo Law School of Fundação Getulio Vargas FGV DIREITO SP

Michael Halberstam

Columbia Law School, Center for Law and Economic Studies

Date Written: July 1, 2014

Abstract

Strikingly absent from the entire corporate governance and corporate litigation debate is a unique feature of American civil procedure that deserves special attention: the modern civil discovery regime. This Article attempts to fill this gap. We argue that modern discovery — first established by the Federal Rules of Civil Procedure in 1938 — has had a profound impact on the evolution of shareholder litigation, corporate governance, and the culture of corporate disclosure in the United States.

This Article shows that (1) litigation discovery, and its threat, have driven and structured the process of corporate shareholder litigation; (2) the information generated by discovery has stimulated the development of case law defining shareholder rights and managerial duties; (3) the episodic legal demands for detailed corporate internal information (and the threat of discovery) have induced incremental improvements in corporate governance practices, including more exacting decision procedures, internal monitoring, recordkeeping, and disclosure; (4) highly developed, continuously evolving discovery practices have established templates for independent corporate internal investigations by boards and regulators; and (5) discovery has given regulators steady insight into changing corporate internal practices and patterns of wrongdoing to which regulators have responded with broad legal and regulatory changes. This Article concludes that litigation discovery serves, inter alia, as a form of ex post disclosure, which complements and enforces ex ante disclosure under the federal securities laws.

These observations have important normative implications for legal transplants and the enforcement debate. Among other things, this Article cautions against legal transplants of U.S.-style securities disclosure, aggregate litigation mechanisms, and other enforcement mechanisms without considering appropriate tools for investigating corporate internal wrongdoing ex post, and points to problems in the empirical literature on U.S. shareholder litigation outcomes. It also questions current proposed reforms to the federal discovery rules.

Keywords: corporate litigation, shareholder litigation, corporate governance, corporate law, securities law, civil procedure, fiduciary duty, discovery, law and economics, financial markets development, comparative corporate law

JEL Classification: K22, K41, K40, K42

Suggested Citation

Gorga, Érica and Halberstam, Michael, Litigation Discovery and Corporate Governance: The Missing Story About the 'Genius of American Corporate Law' (July 1, 2014). Yale Law & Economics Research Paper No. 501. Available at SSRN: https://ssrn.com/abstract=2239322 or http://dx.doi.org/10.2139/ssrn.2239322

Érica Gorga (Contact Author)

São Paulo Law School of Fundação Getulio Vargas FGV DIREITO SP ( email )

R. Rocha, 233, Bela Vista
São Paulo, 01330-000
Brazil

Yale University - Center for the Study of Corporate Law ( email )

127 Wall Street
New Haven, CT 06511
United States
203-988-6500 (Phone)

HOME PAGE: http://www.law.yale.edu/faculty/EGorga.htm

Michael Halberstam

Columbia Law School, Center for Law and Economic Studies ( email )

435 W. 116th Street, Box A-22A
New York, NY 10027
United States
646-285-6281 (Phone)

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