Vanderbilt Law Review


Stephen J. Choi

First Page



Shareholders of large publicly held corporations face a well- known collective action problem. To the extent an individual shareholder bears all the costs of activities that benefit the entire group of shareholders (giving the individual shareholder only a fraction of the benefits), the individual shareholder will have marginal incentive to pursue such collective activities. Corporations owe their shareholders specific duties and rights. However, due to the collective action problem, no single shareholder may seek to litigate these rights. In the context of the federal securities laws within the United States, the U.S. regime provides a solution: private class actions. This Article discusses the American experience with securities class actions and future possibilities for class actions in other countries.

Class actions, at least in theory, work to ameliorate the collective action problem confronting shareholders. Instead of each shareholder pursuing an individual action, the entire class may, by relying on the efforts of the plaintiffs' representatives and attorneys, pursue a single, unified action against a corporation and related defendants. The class as a whole then internalizes both the full costs of pursuing the action and the benefits from the action. Moreover, representatives of the class can negotiate with and select the best plaintiffs' attorneys as lead counsel to advance the litigation.

While class actions are a potentially useful mechanism to discipline opportunistic managers and controlling shareholders, they are not a panacea for the shareholder collective action problem. Due to strong pressures to settle from both plaintiffs and defendants, some commentators have argued that plaintiffs' attorneys have a strong incentive to file frivolous complaints. Frivolous suits include suits in which the plaintiffs have no expectation of finding any evidence of fraud or culpability on the part of defendants. Arguably, frivolous suits also include, more broadly, situations in which the plaintiffs' expected costs of undergoing a trial exceed the expected benefits of doing so (but the plaintiffs file suit nonetheless to extract a positive settlement from defendants unwilling to go to trial).

Even in lawsuits that are more clearly meritorious, the interests of plaintiffs' attorneys and the shareholder class members may diverge, both over the size of the attorney fee award and the effort that the attorneys expend in litigating the class action. In addition, private class actions pose yet another problem: plaintiffs and plaintiffs' attorneys, unlike government officials, act as profit maximizers and will file suit only where profitable. Because many of the costs of pursuing a class action are fixed, plaintiffs' attorneys will not file actions for instances of securities fraud and managerial breach of fiduciary duties involving relatively insignificant sums of money. A minimum size effect therefore exists in determining the incidence of securities class actions (whether frivolous or, importantly, meritorious). For smaller firms, private class action litigation is exceedingly rare.