How Can a Company Defend Against Securities and Shareholder Litigation?

Businesses will need to take a variety of steps to protect themselves financially. However, the more complex a business is, the greater the chance that it will face issues related to investments, reporting, and other financial issues. Failure to follow the correct accounting or reporting practices may lead to business litigation. In cases where a company encounters disputes with shareholders or investors, owners and partners may need to determine how to defend against litigation and resolve disputes while minimizing their financial losses.

Securities Litigation and Shareholder Disputes

The Securities Act of 1933 is one of the key laws that affects companies in the United States. This law seeks to protect investors by ensuring that companies that offer stock for public sale meet certain requirements. A company must register with the Securities and Exchange Commission (SEC) and publish a prospectus that provides potential investors with financial information that can help them determine the benefits and drawbacks of investing in the company. This prospectus must include information about the types of business the company engages in and its executive management, as well as independently-certified financial statements.

Investors may pursue litigation against a company based on alleged violations of the Securities Act, and in some cases, the SEC itself may pursue legal action. Plaintiffs in securities litigation may claim that a company provided false or misleading information to prospective investors that caused them to experience financial losses. The standards that must be met in these cases are relatively low, and an investor will not need to show that a company acted intentionally when it provided incorrect information. Simply showing that the information provided in a prospectus was false or misleading will usually be sufficient, and an investor may be able to recover damages equal to the difference between the amount initially invested and the value of the shares of stock at the time that they were sold or when a lawsuit was filed.

There are some exceptions to the Securities Act, and a company may not be required to register with the SEC in cases involving offerings that are of limited size or only available for sale in the state where the company is located. However, shareholders may still pursue litigation if they believe that they suffered losses because of false information or other violations. The burden of proof is likely to be higher in these cases, and a plaintiff will often need to show that a company or its executives acted wilfully or negligently, such as by committing a breach of fiduciary duty or engaging in fraud.

Sources:

https://www.ktmc.com/files/22946_primer_10_2019.pdf

https://www.investopedia.com/terms/s/securitiesact1933.asp

https://www.americanbar.org/groups/litigation/committees/securities/articles/2021/four-proactive-steps-public-pricate-companies-sec-enforcement/