Stoneridge, the Supreme Court and the Rule of Unintended Consequences
J. Robert Brown | Wednesday, October 10, 2007 at 01:00PM For those promoting shareholders rights, it has been a long winter. The most recent example has been Stoneridge.
Stoneridge demonstrated the result oriented, anti-shareholder nature of the Chief (he was recused, waited until after the briefs were filed, then, at the last minute, unrecused) who without any doubt had his mind made up at the oral argument and no doubt had his mind made up when he decided to unrecuse. He joined the panel to make sure the anti-investor opinion likely to come down had a majority. Similarly, Justice Scalia, who is the strict constructionist, who emphasizes the language of the statute over all else (including legislative history), and favors dictionary definitions, will likely ignore all of these principals in order to find against shareholders.
An opinion will be written that will reduce the rights of investors to recover even for egregious behavior by vendors. For those who argue that this will open a new vista and lead to run away liability, the argument is not born out by the facts. Prior to Central Bank, aiding and abetting liability allowed plaintiffs to reach vendors. Somehow the US economy survived and vendors did not confront the risk of untold liability. Nonetheless, the majority on the court seems to buy this argument.
Here is what will happen. The Court will craft an opinion that makes cases against vendors impossible, even vendors that have been alleged to have falsified documents and backdated contracts. As Joe Grundfest noted in an NPR interview, these sorts of things can be handled by both SEC enforcement authority and criminal prosecution. Here lies the unintended consequence. By cutting off the private enforcement mechanism, the Court will force government authorities to police vendor behavior. It will mean that people at companies like Motorola and Scientific-Atlanta will confront not civil liability (with any settlement amounts likely paid by D&O insurance policies) but criminal prosecution. This has already occurred, for example, with respect to backdating. The organizations that opposed Stoneridge on behalf of business will simply provide additional impetus to criminal prosecution of corporate officers and directors.
While this Blog has a shareholder/investor bias (although we are happy to publish views of all varieties), we do not favor the criminalization of officer and director behavior. But as the standards of behavior fall (state law continues to eviscerate the standards and the Supreme Court undercuts private enforcement mechanisms), criminal prosecution is the one remaining avenue for accountability. We will watch for the Stoneridge decision and see whether it furthers the criminalization of officer and director behavior.
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http://blogs.law.harvard.edu/corpgov/2007/10/08/shareholder-rights/
Shareholder Rights?
By Robert A.G. Monks, Principal, Lens Governance Advisors, on Monday October 8, 2007 at 8:38 am
A recent decision of the federal District Court for the District of Massachusetts has ruled that I cannot serve as class representative in a securities-fraud class-action because, the court said, I am an “activist shareholder.” The decision concludes:
“Both [John P.M.] Higgins and Monks are “shareholder activists” and, as such, subject to unique defenses. Specifically, defendants aver, Higgins and Monks purchased shares of [the company] to “engag[e] in activist strategies [and] overcome existing corporate governance problems to enhance shareholder value.” In particular, defendants argue that Higgins and Monks purchased shares . . . on the theory that the company was poorly managed and that the stock price would likely decline; therefore, they could not have relied on any alleged misstatements. They point to, inter alia, the following facts: (1) Higgins and Monks “had numerous communications with . . . directors and management”; (2) Monks had two friends “[who] were [directors], whom he regarded as sources of inside information”; and (3) Monks “published several books . . . which undermine any suggestion by plaintiffs’ counsel that Monks[ or] Higgins relied on any alleged misstatements by Defendants.”
While their status as “shareholder activists” does not, ipso facto, disqualify Higgins and Monks from serving as class representatives, in this case, the record suggests that they may be subject to unique defenses and therefore do not satisfy the “typicality” requirement. Accordingly, I decline to name them class representatives.”
Over many years of active involvement in the governance of American corporations, I have come to the conclusion–documented in Corpocracy, to be published by Wiley this November–that shareholder rights are, in fact, a nullity. It has often been observed that the only meaningful role for an American shareholder is as a plaintiff, particularly in class-action litigation. There is, therefore, profound irony in the fact that someone characterized as an “activist shareholder” would, by virtue of that designation, be foreclosed from representing a class in securities-fraud suits. The logical and linguistic torture of being excluded from the class–made all the more difficult by the fact that it was gratuitous, given that the court permitted another plaintiff to serve as class representative–simply because I am a “shareholder activist,” subject only to the assurance that this status is not an ipso facto disqualifier from serving as a representative, is less painful than the realization that, in the year 2007 in the Commonwealth of Massachusetts, one is literally powerless to have an impact in cases of acknowledged corporate fraud.
The district court’s Memorandum of Decision is available here.