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Comment by idopmstuff | Hacker News Reader

I'll never truly understand what the practical value of suing companies as a shareholder of those companies, when if they lose, they have to pay it out of cash, which is neutral for you as a shareholder. You're incurring the cost of litigation either way, so it's always a negative proposition.

That's obviously only true if you remain a shareholder, but given the majority of stock generally doesn't change hands it seems like most people who are being represented as the victims in these lawsuits are worse off. Shouldn't the people who remain shareholders be able to exclude themselves from the suit, thus shrinking the size and maybe making it cheaper to settle? (It is possible this is a thing you can do, I've just never heard of it.)

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I worked closely with lawyers for a time and a colleague of mine pointed out something interesting. She said that if we could remove emotion entirely from lawsuits and get both parties to only think rationally, the vast majority of lawsuits would never happen.

Now apply that to family law

Funny you say that. I tried and failed really badly. In a lifetime full of mistakes, that’s one that I’ll never forgive myself for.

Sounds rough. Sorry you had to go through that.

> get both parties to only think rationally

Sounds like a Causal Decision Theorist. Every other rational decision theory supports suing under some circumstances, and refusing to settle under some circumstances; even when the expected monetary return (considered in isolation) is negative.

See https://intelligence.org/2018/10/31/embedded-decisions/

That is very interesting- thanks for sharing. And holy cow, do I love HN.

For the same reason we lock people up in prison. It’s a punishment and incentive to behave.

Also, oftentimes the bad action of the management impacts the value of the company. The past malfeasance and fraud committed by Wells Fargo is an excellent example of that, where it moved to criminal liability.”

Not necessarily, depending on how many shares you own.

Typically shareholder lawsuits are brought by minority shareholders (or, as you say it’s pointless) seeking to get paid to compensate for some malfeasance they feel was being perpetrated against them by the majority shareholders (and management, as their agents).

> Typically shareholder lawsuits are brought by minority shareholders

I don't know if this is true - I just asked Claude and it said the type of lawsuits I described are significantly more common, at least among suits against public companies.

But regardless of relative frequency, you say it's pointless, so why does it happen? (The answer seems clearly to be because the lawyers want it to happen, but still seems like it's a very inefficient process for most shareholders.)

I think that's basically the answer. In many cases, the process is initiated by lawyers looking for litigants. It's a big payday for the law firm and peanuts-out-of-your-own-pocket for actual shareholders.

I think what parent meant is that the lawsuit is not pointless if and only if it is brought by a minority shareholder.

Minority shareholders don’t control the cash held by the company so they need to sue to get access to it.

A majority shareholder might still decide to sue, hoping that any short-term loss would be offset by long-term gains if the lawsuit served to dissuade future malfeasance on the company's part.

A majority shareholder controls the company.

Wouldn’t they be better served by actually just doing their job? As far as to dissuade future malfeasance?

They already have all the control and power.

Many shareholders aren't in the business of managing a company directly. They simply want to invest in companies that are run well. Just because they have the power doesn't mean they know how to wield it correctly, let alone want to be the person to do so.

You might want to read my comments again.

If they are the majority shareholder, suing the company they are the majority shareholder in for some tort has about as much point as suing themselves for punching themselves in the face.

They could literally just do a board consent to pay themselves directly instead if they wanted to. Or direct their management to do it, since they can literally fire that management otherwise (minor edge cases of bylaws withstanding).

A minority shareholder potentially has a lot of reasons to do a shareholder lawsuit though, especially in a privately held company where they can’t easily sell their shares.

They might be getting drug along on all sorts of silly wasteful misadventures, for instance, and have no control or way to get out.

It's certainly valuable to the law firms. And they only need shareholders as pieces on the game board, not core participants.

There are a few good reasons to sue as a share holder. The first is that you just have different interests. For example, the board and CEO decide to do something that benefits themselves and their other financial interests. In that case you can sue and stop them doing whatever it was. So it's a mechanism of control - and you don't need a shareholder vote or a majority of support, what you can force can be unpopular but in your interests. That was the pretext for Tesla getting sued for Elon Musks' compensation package - the shareholder won and Musk had to hand back billions in compensation, that's strictly a financial gain for the shareholders.

But secondly, there's the meta game. If you're a good lawyer and you spot some company doing something egregious you can go shopping. Go and find a shareholder and say "Hey, we can sue that company, I'll take care of all of it, I just need your name because you're a shareholder". You can then conduct a massive expensive lawsuit against the company and if you win? They have to pay your exorbitant costs. Going back to the Musk example, the shareholder who sued to reverse the compensation package had a derisory number of shares, but the lawyers who took on that case are now asking for something like $5Bn in costs. That's a pretty nice payday, and in some ways it works like a bounty against companies with poor governance.

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