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In the newsbytes that my broker provides, more and more often, I keep seeing news of law firms filing class action suits against various companies for "breaches of fiduciary duty".

The companies that I have seen these suits brought against are highly reputable and not fly-by-night types. There never seems to be any follow-up stories in terms of results of such a class action.

Aside from creating a mild dip in the share price, what are the other ramifications of these lawsuits for average shareholders? Are these legal actions just vacuous?

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2 Answers 2

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As an investor, I try to interpret the suits as an attempt to in some way influence the actions of the company - and not, usually, as a serious legal threat (or as likely to lead to serious legal consequences).


My (shallow) understanding (as a non-lawyer) is that the requirements for a lawsuit to be filed as class-action suit are (relatively speaking) easier to meet when the company is publicly traded - the shareholders are more easily described as a "class". So it's more common for lawsuits that involve stock holders for large, publicly traded companies to be registered as class action suits.

Class action suits include a requirement for some advertising and notifications (so all members of the class become aware of the suit, and can decide whether to participate).

So, these types of suits can be started with various goals in mind, goals which might be achieved without the suit ever going anywhere - including to gain some publicity for a particular point of view, or to put pressure on the company to perform particular actions.

In most cases, though, they are the result of misunderstandings between the various parties with an interest in how the company is run - shareholders, directors and/or executive officers.

For most cases, the result of the suit is a more in depth sharing of information between the parties involved, and possibly a change in the plans/actions of the company; the legal technicalities differ from case to case, and, often, the legal consequences are minor.

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Mostly these are results of arguments between shareholders. These suits come when shareholders alleged that directors didn't act in their best interests. Unless its a class action suit, I'd say there's no ramifications for an average shareholder.

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