As shareholder litigation expands globally and increases in economic significance, so does the interest of parties in fighting over the rules that govern it and determine its scope. Sometimes this fight is over legislative or regulatory limits, but it can also occur in the context of private ordering. To what extent can the players in shareholder litigation—companies, management, shareholders, and other investors—set the rules for litigation through private agreement? These agreements may be negotiated and involve explicit consent, in a clear analog to sophisticated commercial contracts. But at other times the locus of this private ordering is itself contested. In particular, the question arises whether provisions in charters and bylaws or in prospectuses may shape litigation.
Our paper, ‘Private Ordering of Shareholder Litigation in the EU and the US,’ takes a comparative approach to answering this question. It begins with the US example, in which dispute resolution provisions emerged in the constituent documents of US companies as a response to pressures from litigation. It then examines how private ordering of shareholder litigation might function (or not) in the context of the EU and some of its constituent countries.
In both the US and the EU, the availability of private ordering depends on the type of disputed claim. In particular, consequences are distinct for corporate governance (or ‘intracorporate’) suits and for securities suits in which investors contend that there have been material misstatements or omissions, accounting or prospectus fraud, or other securities law violations.
Dispute resolution bylaws have been tested in US state courts and were the subject of subnational legislation in Delaware. In the US, the most defensible reach of dispute resolution charter and bylaw provisions is to the category of state-law corporate governance claims, with breach of fiduciary duty a typical claim. It is not clear, however, whether corporate organizational documents can modify disputes involving securities litigation. In particular, an argument that charters and bylaws can alter the rules of securities litigation must contend with the explicit non-waiver provision in the securities laws; at some point, the absence of any way to enforce a right may be equivalent to a waiver of that right.
In contrast, the availability of choice-of-court clauses in the EU depends in part on whether the shareholder suit directly concerns the validity of corporate decisions. Within that context, private ordering is quite limited. Other types of intracorporate claims by investors can, in theory, be subject to private ordering. The availability of private ordering in the EU is further limited, however, by other noteworthy aspects of this comparison: the importance of determining whether the investor qualifies as a consumer under EU law and possible limitations to the circulation of jurisdiction clauses along with securities. These aspects trigger limitations that may prevent the enforcement of jurisdictional agreements or arbitration clauses altogether or as to specific litigants, and may curtail other deviations from default procedural law.
Striking a good balance between standardization and flexibility in shareholder litigation is not an easy task. Our paper contributes to the debate on private ordering solutions in shareholder litigation by highlighting the pros and cons of the US and EU regimes. We believe the two systems can take inspiration from each other because they face similar concerns, but answer them with different legal techniques.
Matteo Gargantini is Assistant to the Commissioner (official) at the Commissione Nazionale per le Società e la Borsa (‘CONSOB’) and Verity Winship is Professor of Law at the University of Illinois College of Law.