Shareholder rights again under attack
Some folks hold the view that corporations are people. And it’s hard to disabuse them of this notion when the Supreme Court implies as much by allowing them to spend unlimited amounts of cash on federal elections.
But here’s the thing — there are still people (real people, that is) in charge of the corporations. Shareholders, from the very small individuals to the humongous pension plans, are the owners of the public corporations traded on recognized exchanges. For a whole host of reasons the shareholders have done a disastrous job of keeping the companies in check, but in theory at least, they do have the power to do so by voting at the annual meeting, exerting pressure on executives outside of these meetings and by resorting to legal remedies when the companies really screw up. But now some powerful interests are looking to change this, too.
Businessweek reports that the Carlyle Group, a private equity firm a lá Mitt Romney’s Bain Capital, wants to set a new precedent by disallowing shareholders from filing class-action lawsuits. It would instead force them to resolve any claims against it through binding arbitration.
Carlyle, whose success is built on getting some Very Important People like former President George H.W. Bush and James Baker to join its board, wants to go public but does not want its future shareholders to have the right to file class-action suits. How important is this right? Lynn Turner, the SEC’s former chief accountant, told Businessweek that “the majority of the enforcement of the U.S. securities laws is not done by the SEC but by attorneys for investors.”
Now the SEC is the only body that might actually be able to stop Carlyle from eroding shareholder rights in this way. It has historically blocked other attempts like this and will now have to give Carlyle the thumbs-up or -down on its plan. But if the SEC objects then Carlyle might take the fight to the Supreme Court. And if that happens it’s quite likely that the court will decide in its favor, as it’s made a series of pro-arbitration rulings in recent years.
One could actually argue that the penalties and awards given to shareholders in class-action lawsuits don’t serve as an adequate deterrent to corporate malfeasance because they’re not high enough. Shareholders in Enron, for example, were awarded $7.1 billion whereas the company’s collapse destroyed $60 billion of its market value, $2 billion of its employees’ pension plans and an initial 5,600 jobs. If Carlyle wins this other companies will surely follow. What will the landscape look like then?
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- Related story: Public interest and the Robin Hood of the law
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Image credit: InsideMyShell on Flickr
Category: Shareholder rights
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