Information Litigation in Corporate Law
48 Pages Posted: 17 Aug 2019
Date Written: August 16, 2019
In recent years, shareholders have started to launch information lawsuits with new vigor. These demands — which often yield valuable corporate data without an explicit contractual right or public disclosure obligation — are typically brought in connection with a shareholder grievance about some other matter. Firm managers often resist the intrusion, leading to some blockbuster disputes. Indeed, it is becoming increasingly clear that information litigation is starting to play a much greater gatekeeping role for corporate governance problems. There are often serial litigation battles where a fight over access to firm information is followed by a fight over the primary governance concern. Delays associated with the initial information lawsuit can even stymie resolution of the primary case.
Notwithstanding this increase in information litigation, lawmakers lack a comprehensive theory for evaluating the private right to corporate information. Many courts and commentators offer only short statements about a need for balance: shareholders should be able to obtain information necessary to exercise their rights, but they should not be able to harass managers or expose crucial corporate secrets. Legal standards for adjudicating private, ex-post information demands are vague. Most disputes are decided by asking whether the requested information is “necessary and essential” for pursuing a “proper shareholder purpose.” But how should we award and scope this right?
This article argues that inspection rights are best justified in connection with efforts to mitigate managerial agency costs through forensic review. Much of corporate law seeks to maximize the benefits of centralized economic activity while minimizing the costs of suboptimal agent decision-making. Endless varieties of agency problems exist, but the distortions are all grounded in information asymmetry. Shareholder inspection rights are thus well-suited to addressing agency lapses, and they are warranted in connection with this fundamental aim. An important corollary to this claim, however, is that shareholder inspection rights may not be a fundamental entitlement when deployed more broadly. If so, then corporations should enjoy some latitude to modify inspection rights via private ordering.
Keywords: corporate law; shareholder litigation; inspection rights; corporate governance
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