3.7.2.3 Direct shareholder damage and securities class action lawsuits

Sometimes shareholders do not have to go the route of the derivative suit and can bring a direct claim for damages against directors, as in Smith v. Van Gorkom, where the board gave a rubber stamp agreement without any investigation leading to a loss for the shareholders.

The largest volume of shareholder claims involve securities cases. A typical securities class action seeks damages on the grounds that the company has misled investors. The defendants typically include the company itself, the CEO and the CFO. Outside directors are named in 50% of the cases based on Section 11 Securities Act 1933 and in 15% of the Section 10(b) Securities Trading Act 1934 cases. Other defendants may include the company's auditor and investment banket In all these cases the court appoints a lead plaintiff, as in all class actions, and directors can file a motion to dismiss the case, for Jack of prima facie facts presented by the plaintiff to suggest liability. Of all actions it is the Section 11 action that is most feared by outside directors, because the standard of conduct there is negligence, and the outside directors have the burden of proving an absence of negligence.