Corporate Governance Issues in Litigation

Corporate governance issues tend to get a lot of attention when litigation arises between companies, but are courts (or attorneys, for that matter) looking at everything involved in corporate governance? We think they tend to overlook several key aspects of a company’s structure and organization that affect corporate governance issues, so we’re going to go over what courts tend to ignore and why it’s a problem.

Let’s start by taking a minute to go over the standard definition of corporate governance.

Traditionally, the term “corporate governance” has been defined by the formal legal structure of the corporation, covering things like who has the right to make decisions (essentially, who has control over the corporation). The members of the board of directors, senior management, and shareholders tend to be included in this structure to varying degrees, but there are some key aspects of a corporation’s structure that tend to be left out of discussions regarding issues of corporate governance.

Specifically, we think courts should look at the way a company is organized, who reports to whom, who manages risk and how, as well as how internal controls are managed, and how information is gathered and used. These are all issues of corporate governance, and yet none of them ever get mentioned in discussions of corporate governance, much less how it plays a role in litigation.

Because corporate governance issues are usually defined as issues relating to just the formal legal skeleton of a corporation, questions of corporate governance only come up in disputes over corporate control and allegations of breach of fiduciary duty. But if we define corporate governance more broadly, we’ll see that it can be applied to all sorts of matters dealing with the operations of a corporation.

Instead of using corporate governance exclusively to address questions of who gets to make which decisions for a company, issues of corporate governance can also be brought up when disputes arise over the kinds of decisions a corporation makes. For example, corporate governance issues could be included when arguing over a company’s decision to disclose information under the securities laws, or when a company is accused of breaking the law.

Let’s take a look at one situation in which a broader definition of corporate governance issues could impact litigation. A common occurrence in securities fraud class actions is for the discovery process to reveal an email from a low-level employee that includes statements about what the employee perceives to be the downward trajectory of the business. Had the plaintiffs had access to this information prior to buying the company’s stock, they never would have bought it.

Without applying issues of corporate governance to this situation, the litigation tends to revolve around the information and how it was disclosed, but with our broader definition of corporate governance, we could examine the company’s corporate governance system to determine how it played a role in whether, when, and how the information in question was disclosed.

Thinking about corporate governance in this way can help experts break down the information for jurors who might have little or no experience with how a company operates. They might be trying to figure out how “the company” behaved, and how it should be held accountable, without considering the fact that a company’s behavior is dependent on the behavior of its managers and employees. Because that behavior is determined by the company’s corporate governance, litigators need to take a close look at it in order to determine how it played a role in the company’s alleged misconduct.

At Lubin Austermuehle, we focus on relationships and are driven by results. When it comes to unraveling complex business disputes, we are proud of our track record of outright victories in court or substantial and lucrative settlements for our valued clients. In every case, our goal is to resolve disputes as quickly and successfully as possible, helping business clients protect their investments and get back to business as usual. We serve clients throughout Illinois and the Chicagoland area. You can contact us online here or call us at 630-333-0333.