Six essential elements of shareholder litigation | RMO LLP
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Six essential elements of shareholder litigation

Publicly traded companies have a duty to their shareholders to provide transparency and make every attempt to create a reasonable rate of return.

When businesses struggle, that can create issues that put executives at odds with each other, the public, regulators and shareholders as they attempt to produce profits and maintain shareholder value.

That pressure to perform sometimes means that executives may not adhere to the law in an appropriate way, creating a potentially illegal situation that could result in shareholder litigation.

Shareholder litigation can take many forms:

  • Fraud
  • Conflict of interest
  • Accounting improprieties
  • False or misleading financial statements
  • Breaches of fiduciary duty
  • Excessive executive compensation issues
  • Department of Justice or Securities and Exchange Commission investigations
  • Violations related to consumer protection or environmental laws
  • Merger and acquisition issues

For a company executive to be found guilty in a shareholder litigation case, plaintiffs must plead six elements to make their claim.

  1. A material misrepresentation or omission – A statement is considered material if a reasonable investor would consider it important in determining whether or not to buy or sell a stock.
  2. Scienter – Plaintiffs must prove a defendant acted in a wrong state of mind vs. just being negligent or making a poor business decision.
  3. Connected to the sale of a security – This requires the plaintiff to engage in some kind of transaction involving a security, not merely just holding it.
  4. Reliance – Plaintiffs are not required to prove they relied on the defendant’s misrepresentations. The market’s incorporation of the available information is sufficient instead.
  5. Economic loss – Plaintiffs must allege they sustained a loss from their investments.
  6. Loss causation – Plaintiffs must show there is a connection between the misrepresentation and the loss.

Raun Muntz O-Grady LLP serves clients in Los Angeles, Hollywood, West Los Angeles, Santa Monica, Beverly Hills, Anaheim, Orange County and communities throughout Southern California.

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