Stoneridge Redux: The Impact on Competitiveness (IV)

Stoneridge must be looked at in the broader context of shareholder rights. Shareholders in the US do not have the same rights that are common overseas. In Britain, for example, shareholders have say on pay and access. Not in the United States. What shareholders in the US do have is greater opportunity to vindicate their rights through litigation. But that right has come under increasing attack.

Perhaps most notoriously, the Committee on Capital Markets (aka the Paulson Committee) has written an interim report in part blaming litigation for the decline in the competitiveness of US securities markets. The conclusion, however, is hotly debated, unproven, unquantifiable, and ignores or deemphasizes other reasons that explain the decline. The Report, for example does not even mention that securities class action law suits hit a 10 year low in 2006, suggesting that litigation had peaked (perhaps as a result of SOX).

Nonetheless, it has become popular to blame litigation for problems in competitiveness. In Stoneridge, the majority repeated this mantra. According to the opinion:

• Overseas firms with no other exposure to our securities law could be deterred from doing business here. This, in turn, may raise the cost of being a publicly traded company under our law and shift securities offerings away from domestic captial markets.

In other words, vendor liability would result in a decline in the number of IPOs in the United States. A relatively specific and remarkable conclusion, the majority, in addition to being cagey in its language (noting only that firms "could" be deterred) cited only one source: The Nasdaq amicus brief. In other words, the Court could come up with no direct authority of its own. And what support did the Nasdaq brief have for the proposition?  After listing evidence of securities business going to foreign markets, the brief noted:

• In light of these trends, several recent major studies have concluded that the U.S. public equity market is losing competitiveness with foreign markets.  As countries compete with one another for pools of capital, one dimension of their relative competitiveness is litigation risk and the perception of such risk. As one study summarized, “certainly one important factor contributing to this trend is the growth of U.S. regulatory compliance costs and liability risks compared to other developed and respected market centers.” While these concerns should not be overstated, and the $20 trillion U.S. equity capital pool remains the largest in the world, the growth of competition from foreign stock exchanges means that new litigation exposure that increases the cost of being a U.S. publicly traded company may tip the balance in a company’s choice of where to list. Such disincentives to public listing of equities on U.S. exchanges risk harming U.S. investors and the U.S. economy. (footnotes omitted)

Note the care of the language.  One "dimension" of competitiveness is "litigation risk and the perception of such risk."  The only authority for the proposition was an isolated quote from the discredited Interim Report noting that an "important factor" was "liability risks."  In other words, there is nothing but surmise and speculation.

Moreover, the brief concludes that "new litigation exposure" will increase the cost of being a publicly traded company.  In fact, that's a bit of an overstatement.  Put aside whether the case really involved "new litigation risk," the suggestion that the risk in Stoneridge somehow impacted a willingness to list publicly is misguided.  Nothing in Stoneridge turned on the public or private nature of the companies involved.  Liability turned on their deceptive behavior, not their public/private status.  Thus, any litigation risk might be a factor in determining whether to do business in the United States but once doing business would have little or no impact on a decision to go public. 

To make a point in the opinion that is so poorly defended shows the political/policy nature of the opinion.  The Court wanted to reduce shareholder rights by limiting the instances when these rights could be vindicated in court.  It wasn't about the law, it was about policy, and an anti-shareholder one at that.