Good Honest Dollar $$

Despite being seen by some as a hero in the fight for corporate accountability, lawyer Melvin Weiss received a fair and just punishment.

Mr. Weiss was sentenced on June 2nd to thirty months prison for his involvement in a scheme in which his firm, Milberg LLP, paid kickbacks to plaintiffs in shareholder class action schemes.

Mr. Weiss is widely recognized as the pioneer of the shareholder class action lawsuit. Under such actions, a large number of aggrieved shareholders take legal action against their own company, typically over matters relating to corporate governance or the denial of shareholder rights.

The payment of kickbacks to plaintiffs for involvement in such actions was a clear breach of professional ethics, and the punsishment handed down was well deserved.

But the case raises wider questions about shareholder class actions, and whether such actions are beneficial or harmful to shareholders.

 
Objections to shareholder class actions

Critics of shareholder class actions believe that such actions are beneficial to lawyers but detrimental to shareholders.

Objections to shareholder class actions generally fall into two categories: 

 
• Shareholders are effectively suing themselves.

A class action, as opposed to legal action from individual shareholders, involves a large number of shareholders, or a substantial portion of the shareholder base, taking action against the company in which they own shares.

Given that shareholders own the company they are suing, such actions involve shareholders effectively suing themselves to a large extent – a seemingly pointless exercise.

Meanwhile, the law firms who assist them earn lucrative fees in the process.

 
• Fee hungry law firms may encourage shareholder action over frivolous matters.

Such costly cases represent an unnecessary management distraction. They may also encourage an undue degree of risk aversion, particularly in cases where managers fear that mistakes made as a result of otherwise sensible business risks may lead to litigation.  

 
Benefits of Shareholder Class Actions

However, class actions need not be detrimental to shareholders.

Firstly, in addition to cash payments, shareholders can seek other legal remedies, such as specific actions to improve corporate governance. In such cases, shareholders stand to benefit via improved accountability.

Secondly, in environments where shareholder class actions are not uncommon, the mere prospect of such actions may prompt management to undertake preventative measures to strengthen accountability.

Finally, class actions may represent one of the few legal avenues for minority shareholders to enforce their rights, particularly in cases where companies are controlled by single majority shareholders.  

 
Conclusion

Class actions which are frivolous in nature are detrimental to shareholders as a whole, particularly in cases where settlement involves cash payments only.

Lawyers benefit from such actions, not shareholders.

In order to be truly beneficial to shareholders as a whole, class action settlements must include sensible undertakings to improve corporate governance and accountability.

Shareholders benefit only from greater accountability, not from suing themselves over frivolous matters. 
 

Over to you

What do you think?

Are shareholder class actions beneficial to shareholders?
 
Please feel free to add your opinion by clicking on the comments section above.