I believe that class-action suits are supposed to benefit the class, both in the judgement/settlement and in changing long-term incentives. Shareholder lawsuits appear to do neither.
I also agree that courts are allowing these lawsuits to proceed despite hearing objections like mine.
The idea is that, in your capacity as owner of the company, you sue the company for screwing you over, and it pays a fine to you. But that makes you worse off, because it makes the company worse off, and you own the company.
In the best case scenario, where the suit is costless and 100% of the fine goes to shareholders, the shareholders come out of the suit no worse off -- and no better off -- than they were before they sued.
In any other scenario, they come out worse off.
Imagine that I accidentally hammer my thumb and sue my hammer for the injury. I find it guilty and have it destroyed. How did my situation improve? All that happened is that I'm down a hammer.
Imagine that I accidentally hammer my thumb and sue my hammer for the injury. I find it guilty and have it destroyed. How did my situation improve? All that happened is that I'm down a hammer.
Your hammer is literally just an extension of you so you are just suing yourself. A company is not just an extension of its shareholders. In fact, the whole point of the corporate form is that the business is separate from its shareholders legally, financially, and for all purposes (except for some reason First Amendment rights).
Specifically, the harm they're seeking redress from is a drop in the value of their stock.
And the redress they are seeking is also a drop in the value of their stock.
This is the conceptual problem. Shareholders have not suffered any harm that can conceivably be redressed by a shareholder lawsuit. The only possible effect of the lawsuit is to hurt the shareholders even more than they were hurt before.
They can be filed by shareholders who were harmed by prior corporate account. Not sure for this concept is so hard for people to understand.
TLDR we're taking about different groups of shareholders.
There is an interesting case where they were lucrative for lawyers. The government wanted to discourage "short swing" trading by executives and other insiders. That's a series of trades that includes both buying and selling.
The way they did this was the brilliant rule 16(b). That rule says that officers, directors, and people who own more than 10% of the shares in a company must turn over to the company any profits from short swing trading of the company's stock that occurs within a 6 month period.
So if Bob the CEO buys company stock at $100/share and a month later sells it at $120/share, Bob owes the company $20/share.
What makes it brilliant is:
1. If the company doesn't act and ask Bob to cough up that $20/share, and shareholder can sue Bob to make him do so,
2. If Bob loses, Bob will have to pay the attorney fees of that shareholder,
3. The shareholder did not have to be a shareholder at the time of Bob's trades. They only need to be a shareholder when they file the suit.
The people that 16(b) applies to are the same set of people who are required to publicly report their trades. There were law firms that would get those public reports in machine readable form, have a program go through them looking for people who profited from short swing trades, buy one share in those companies, and then sue. They easily would win, and Bob would have to pay his profits to the company, and the lawyers got to collect their fees from Bob.
And that's not even the worst of it for poor Bob. Suppose Bob had bought at $100, then sold at $90. If that's all he did, no problem because he had a loss, not a profit. But suppose that Bob then bought at $80 and sold at $70. Bob has suffered a loss of $20. No profit, so at least no 16(b) problem, right?
Not so fast. Suppose all four of those transactions took place inside of 6 months. The short swing profit calculation doesn't really care about timing. It just looks for the highest sale price and lowest purchase purchase price in the window and matches as many shares up at those prices as it can. Then do the same thing for the remaining shares, and so on, until as many shares as possible have been matched up.
Bob's buy $100/sell $90, buy $80/sell $70, which is a $20 loss according to Bob's bank account, would be seen as a $10 profit--the buy $80 would be matched with the sell $70. Bob ends up coughing up $10 to the company, on top of the $20 he actually lost, and whatever he has to pay the lawyers who sue him if it comes to that.
This turned out to be so effective at stopping officers, directors, and 10% shareholders from making money off of these short swing trades (or even from breaking even) that they largely stopped even trying--and with no enforcement cost to the SEC. Those people, if they want to trade in their own company's stock, have to pick a direction (buy or sell) and stick with that. If they want to change direction, they need to wait more than 6 months.
Yes, lawyers make a lot of money compared to individual shareholders. But in a class-action lawsuit, they make less overall money then they would if each shareholder had their own lawyer, and it costs the company far less to defend one shareholder class action then several thousand (and this is the entire point of class actions).
Among the shareholder class, there are a few different categories, each wins or loses a different amount due to the class-action:
1) Those who owned the stock at the time of the misrepresentation and continued to own it until the judgement/settlement. These people lose their portion of the lawyers' fees
2) Those who owned the stock at the time of the misrepresentation and sold it before the lawsuit ended. These people benefit from the judgement/settlement amount, minus lawyers' fees.
3) Those who did not own the stock a the time of the misrepresentation, but bought it before the end of the lawsuit. These people lose however much group 2 gained, in addition to some legal costs.
Out of the three groups, 1 and 2 are part of the class, but only 2 benefits from a successful complaint.