A Blended Approach to Reducing the Costs of Shareholder Litigation

Multiforum litigation and federal securities law class actions impose heavy costs on corporations and their shareholders without producing proportionate benefits. Both are largely the result of the agency problem between shareholders and their attorneys, driven more by the attorneys' interests in generating fees than by the interests of their clients. In response to each of these problems, commentators have recommended a number of solutions. Chief among them are forum selection and mandatory arbitration provisions in a corporation's charter or bylaws. This Note recommends that corporations unilaterally adopt both forum selection and mandatory arbitration bylaws to address shareholder lawsuits under state corporate and federal securities law, respectively. This Note also explains why each solution is particularly appropriate for its class of shareholder claims.IntroductionShareholders have three rights with respect to the management of a cor- poration: the right to sell their shares, the right to vote their shares, and the right to sue both the corporation and its managers and directors.1 The last right has proven increasingly problematic for U.S. corporations and their shareholders. In 2012, 96% of public-company acquisitions valued over $500 million resulted in a shareholder lawsuit.2 By contrast, shareholders chal- lenged only 53% of similar deals in 2007.3 This startling shift in shareholder litigation raises the question: Are the vast majority of corporate deals actu- ally illegal, or is something else driving this trend?The right to sue has traditionally been viewed as a response to the agency problem of corporations,4 and it is intended to serve both a deterrent and compensatory role for shareholders. The deterrent aspect of shareholder litigation seeks to minimize agency costs and better align the interests of a corporation's managers and directors with those of shareholders by punish- ing managers and directors when they "misbehave."5 The compensatory as- pect aims to mitigate agency costs by reimbursing shareholders for damages caused by poor management.6 Over time, however, these two goals of share- holder litigation have deteriorated, and a new agency problem has arisen: the interests of many shareholder-plaintiffs' counsel now supersede those of their shareholder clients.7 As a result, much of shareholder litigation today merely transfers wealth from corporations and their insurance companies to the plaintiffs' bar, with few benefits accruing to the shareholders themselves.8Private shareholder claims can arise under one of two distinct bodies of law: state corporate law or federal securities law. Each state has its own cor- poration law that controls the mechanics of the companies incorporated within that state. The most influential is the Delaware General Corporation Law ("DGCL"). Delaware is generally viewed as having the most well-devel- oped and advanced state corporate legal system, and the majority of U.S. corporations are Delaware corporations.9 Because of the widespread influ- ence of the DGCL, this Note focuses only on Delaware law and the federal laws that preempt it.The term "federal securities law" describes a series of statutes adopted by the federal government regarding corporate securities and the regulations promulgated pursuant to those statutes. Publicly traded corporations and the securities they issue must comply with these statutes, the most impor- tant of which are the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act").10 In addition to granting various private rights of action to shareholders of public corpora- tions, these statutes are also independently enforced by (1) the U.S. Securi- ties and Exchange Commission (the "SEC"), a federal agency that can bring civil charges against individuals and corporations for violations of federal securities law; and (2) the U.S. Department of Justice (the "DOJ"), a federal department that can bring criminal charges against individual and corporate violators of federal law. …