Corporate Reform Through Securities Class Action Settlements

Securities fraud class actions continue to result in enormous cash settlements, even as the number and frequency of such lawsuits have declined.[FOOTNOTE 1] Increasingly, however, these class action settlements have come to be viewed, particularly by public pension funds and other institutional investors, as an opportunity to impose systemic corporate governance reforms. One potential source of this trend has been the lead plaintiff provisions of the Private Securities Litigation Reform Act (PSLRA) of 1995,[FOOTNOTE 2] which sought to encourage institutional investors to take a more prominent role in securities class actions.

This article will examine the potential conflicts of interest that arise when institutional investors seek to use securities class action settlements to pursue their corporate governance reform agendas. This article also discusses a recent development: institutional investor lead plaintiffs affirmatively seeking equitable relief in the form of specific corporate governance reforms in the class action complaint. This development is problematic, because class action plaintiffs presumably would not be entitled to such relief under the federal securities laws if the matter were contested, and because it appears that class actions are being utilized as a vehicle to circumvent the channels through which shareholders properly may seek corporate governance changes under state or federal law.