Daily Journal (California)
Securities litigation attorneys Jim Kramer and M. Todd Scott recently authored an article in the Daily Journal entitled, “Litigation Threat in Sheep's Clothing” which discusses the potential threat of shareholder litigation. An excerpt from their article is included below.
Most public company general counsels can safely assume that their company is eventually going to be targeted by a shareholder lawsuit. Thankfully, given the heightened pleading requirements for securities class actions and derivative lawsuits, general counsels can also assume that absent some actual wrongdoing, plaintiffs will have a very difficult time in maintaining their case past the pleading stage. In short, the threat of shareholder litigation is real, but so too are the myriad protections companies enjoy.
Recently, however, activist shareholders and plaintiff firms have taken up an unexpected strategy of attack, one that is not only sanctioned by the courts, but can catch many general counsels off guard. The new strategy? Issuing a books and records request for confidential company documents. With confidential company records in hand, a creative plaintiff can often craft a complaint sufficiently detailed to survive a motion dismiss - even where no actual wrongdoing occurred.
Such requests are not in themselves new - shareholders have long had the legal right to request corporate books and records. As Delaware courts have repeatedly recognized, few shareholders have taken advantage of this right, as most shareholder plaintiffs rush to file their complaints before launching any investigation. But that trend is changing - not just because plaintiffs have begun to realize the relative ease by which they can gain a litigation advantage by demanding company records, but because Delaware courts are now all but requiring plaintiffs to investigate their claims before they file. Where plaintiffs seek documents and the companies fail to properly respond, the potential downside risks are also increasingly serious.