The Gatekeepers of Shareholder Litigation

Concerns over agency costs dominate corporate law. The central challenge in corporate law is ensuring that directors act in the corporation's best interests, rather than their own best interests. Shareholder litigation is a key tool in controlling these agency costs, allowing shareholders to sue if directors overstep legal limits. Shareholder litigation, however, has agency costs of its own because most shareholder plaintiffs lack sufficient incentives to closely monitor these lawsuits. As a result, plaintiffs' attorneys can make litigation decisions that benefit themselves at the expense of their shareholder clients. This concern arises in nearly all types of shareholder litigation—from shareholder derivative suits to securities class actions and merger cases. Regardless of the underlying law, shareholder litigation faces a common need for a gatekeeper to monitor and oversee these cases.Yet, despite this shared problem, different types of shareholder litigation use very different gatekeepers. In securities class actions, Congress put its trust in institutional investors. In derivative suits, the law relies on corporate boards. And in merger cases, the law depends on greater oversight by judges in their review of settlements coupled with greater power for corporations to screen these lawsuits ex ante in their bylaws and charters. This Article, written for the OKLAHOMA LAW REVIEW's symposium on Confronting New Market Realities: Implications for Stockholder Rights to Vote, Sell, and Sue, explores why corporate law has chosen different gatekeepers for different types of shareholder litigation. It then argues that the legal system should look for ways to use a greater mix of gatekeepers in these cases