The Use and Abuse of Investor Suits : An Inquiry into the Dark Side of Shareholder Activism

This paper builds on the wide-ranging policy discussion on shareholder activism in Europe. It seeks to define which shareholder actions are useful in reducing managerial agency costs and which could be interpreted as frivolous or abusive. We develop a typology, comprising of a number of Abuse Indicators which may assist courts, investors and management in revealing suits that create unjustified and opportunistic shareholder litigation costs. Investors' actions could be considered as abusive more often than not, if the actions are 1) filed by low-tier law firms that 2) represent professional and recurrent plaintiffs; 3) which hold a small rather than significant stake in the company's stock; 4) the complaints on which the suits rely are of a boiler-plate/carbon copy/formalistic nature; 5) the key motivation of the suits are expected side benefits rather than the desire to enhance the value of the issue in which the plaintiff invested; and 6) the suits are lacking institutional backing by shareholder associations or government agencies. Drawing on two unique datasets, which involve cases respectively in the Dutch Inquiry Proceeding (‘Enquêterecht') and the Rescission Suit in Germany (‘Anfechtungs- und Nichtigkeitsklage'), we hold that Dutch Inquiry Proceedings initiated in the years 2002 through 2008, which often results in a court-induced settlement, involved mostly ‘useful' shareholder interventions to reduce managerial agency costs whereas the bulk of the German Rescission Suits filed between October 2005 and January 2009 - prior to the reform of the law on rescission suits that has come into force in Fall 2009 - were abusive