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It’s the litigation, stupid. Another panel blames high number of lawsuits for keeping foreign investment out of the U.S.
August 1, 2007
Just in case you didn’t get it the first three times, another panel cried foul over “excessive litigation” as a factor in foreign investments leaving U.S. markets and is trying to build support for mandatory arbitration agreements in place of class-action lawsuits.
The panel, convened today by the U.S. Chamber of Commerce, issued academic reports that suggested alternatives to the current litigation system. Some possibilities included a loser-pays system, in which the winning party of a lawsuit does not have to pay legal costs, and allowing mandatory arbitration agreements in IPO charters.
“When people and firms are uncertain whether their acts violate the law or may trigger liability, they will be reluctant to take even prudent risks,” wrote Robert Litan, a senior fellow at the Brookings Institution, in a report released today. Mr. Litan speculated that, while the number of class-action lawsuits has decreased in the last 10 years, new variations on lawsuits—such as climate change lawsuits against corporations—may add unpredictability to U.S. markets.
Kenneth Lehn, a finance professor at the University of Pittsburgh, also released a white paper today that called for allowing shareholders to vote for their corporations to avoid litigation, opting instead for mandatory arbitration agreements. Mr. Lehn even suggested that companies should be allowed to opt out of Sarbanes-Oxley compliance if shareholders approve such votes.
“A consensus seems to be forming” that class-action securities litigation has hurt U.S. competitiveness, Mr. Lehn said during the panel. “The IPO market provides an excellent opportunity to inform the debate on the efficacy of Sarbanes-Oxley.”
The doom and gloom may be overstated. Edward Knight, general counsel and chief regulatory officer at Nasdaq, said during the panel that “the American IPO is still alive and kicking,” even though litigation handicaps U.S. competitiveness. Mr. Knight added that private equity is a growing part of U.S. markets and may be a training ground for new public companies to avoid SarbOx compliance, learn how to raise capital, and then list publicly.
Several reports have already lambasted excessive litigation and jury awards as hurting foreign investment in U.S. markets, including one helmed by Harvard University professor Hal Scott and another touted by Sen. Chuck Schumer (D-N.Y.) and New York City Mayor Michael Bloomberg. A third report by the U.S. Chamber was released earlier this year.
Another report by the Financial Services Roundtable on the competitiveness of U.S. markets is in the works and a study is expected in early fall. The report will examine securities litigation, Basel II capital reserve requirements and international accounting standards, among other issues.
However, Mr. Lehn’s suggestion for mandatory arbitration agreements goes further than those other reports and may see opposition. In his study, Mr. Lehn said that the Securities and Exchange Commission should hold a pilot study on allowing mandatory arbitration clauses in initial public offering bylaws. However, Mr. Scott, whose 2006 report supports arbitration as one option for shareholders, told Financial Week that he would oppose such a move, saying IPOs should have a three-month blackout period for such shareholder proposals.
Mandatory arbitration clauses are controversial and have been criticized by lawmakers and investor advocacy groups. A planned pilot program to allow some arbitration clauses by the SEC was nixed after negative publicity.
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