Intellectual Life Workshop: Dorothy Lund

Wednesday, October 30, 2019 at 12:00pm to 1:00pm

Law Building (LAW), 3500
401 East Peltason Drive Irvine, CA 92697-8000

Dorothy Lund, Assistant Professor of Law, USC Gould School of Law
Corporate law, corporate governance, securities regulation, contracts, mergers and acquisitions

Toward a Mission Statement for Mutual Funds in Shareholder Litigation

This paper analyzes the conduct of mutual funds in shareholder litigation. We begin by reviewing the basic forms of shareholder litigation and the benefits such claims might offer mutual fund investors. We then investigate whether and how the ten largest mutual funds participate in shareholder litigation through an in-depth docket review. We find that although shareholder suits offer potential benefits, the largest mutual funds have essentially forfeited their use of litigation. This finding is particularly striking given that index funds and other long-term oriented mutual funds generally cannot sell their shares when they are dissatisfied with company performance, leaving them with only two levers in corporate governance—voting and suing. Mutual funds vote, but they do not sue.

We analyze potential explanations for the failure of mutual funds to litigate on behalf of their investors. Collective action problems and conflicts of interest raise significant obstacles to mutual fund participation in shareholder litigation. Yet, we argue, there are situations in which shareholder litigation could create value for mutual fund investors. We therefore turn to the normative question: how should mutual funds litigate on behalf of their investors? Answering this question allows us to articulate a mission statement for mutual funds in shareholder litigation.

Our mission statement is grounded on the perspective of the broadly diversified “market investor.” The repeat-play incentives and broad diversification of many mutual funds, and index funds in particular, suggests that they could create value by focusing principally on deterrence objectives. Mutual funds should bring shareholder suits against portfolio companies when doing so would meaningfully enhance deterrence. They should also scrutinize the litigation brought by other shareholders, objecting to outcomes that fail to promote meaningful deterrence. At the same time, mutual funds should focus on compensatory goals in litigation against non-portfolio defendants because extra-portfolio claims do not raise circularity concerns, i.e., the risk that litigation would simply transfer money from one pocket to the other. In addition, mutual funds should consider whether litigation can be used to implement corporate governance reforms. Finally, in all cases, mutual funds should closely monitor litigation agency costs. We close by suggesting ways in which the incentives of mutual funds might be restructured to bring these changes about.

Lunch will be provided.

Intellectual Life Workshop Calendar

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Staff, Faculty


Intellectual Life Workshop


Centers, Intellectual Life
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