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The University of Chicago Business Law Review

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41

Abstract

The U.S. securities laws allow security-holders to bring a class action suit against a public company and its officers who make materially misleading statements to the market. The class action mechanism allows individual claimants to aggregate their claims. This procedure mitigates the collective action problem among claimants, and also creates potential economies of scale. Despite these efficiencies, the class action mechanism has been criticized for being driven by attorneys and also encouraging nuisance suits. Although various statutory and doctrinal “solutions” have been proposed and implemented over the years, the concerns over the agency problem and nuisance suits persist. This paper proposes and examines a novel mechanism that attempts to preserve the benefits of the class action system while curtailing its costs: allowing a company’s shareholders to vote on securities class actions. The shareholders can vote on the structural dimensions of securities class actions, e.g., whether to allow class actions at all, limit discovery, impose fee-shifting, etc., before any class action suit has been filed (ex ante voting) or vote to determine the course of a specific class action suit, e.g., whether to terminate or settle a class action (ex post voting). The paper analyzes the conditions under which allowing shareholders to manage and control securities class actions can benefit the shareholders across the board and its potential limitations.

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