Types of Equity Litigation Cases
Understanding equity litigation and its common types is crucial since the fallout from shareholder rights violations can be quite severe.
Did you know that equity litigation cases can have settlements as high as $735 million? This settlement amount was agreed upon when shareholders alleged directors of issuing excessive compensation to themselves. In addition to shareholder disputes at listed corporations, company and partnership disputes due to misaligned expectations or communication breakdowns can also snowball into equity litigation.
Sometimes, equity litigation cases arise out of disagreements related to mergers and acquisitions, insider trading claims, or any instances when shareholders feel that their rights are violated or the company directors are not looking after their interests.
Understanding equity litigation and its common types is crucial since the fallout from shareholder rights violations can be quite severe. These issues are magnified by how easy it is to misinterpret legal and regulatory frameworks. Hence, in this article, we’ll explore these topics in detail.
What are equity litigation cases?
Equity litigation cases are filed when shareholders feel wronged due to violations of their rights. Often, shareholders seek redressal through equity litigation when external parties take unfair advantage of their company or when their own company’s executives, management personnel, or employees act against shareholder interests.
A company’s executives, management personnel, or employees may act against shareholder interest by attempting to make financial gains at the expense of the shareholders or by abusing their power to favor their friends and relatives through promotions or business deals.
Traditional law may offer inadequate legal remedies in such cases. Therefore, for addressing disputes where traditional legal remedies fall short, equity law is applied.
Can equity litigation cases arise out of unintentional breaches of shareholder rights?
Yes, unintentionally breaching shareholder rights can lead to equity litigation cases. It is clear that the instance of shareholder rights violation occurred unwillingly, all involved parties may be able to find an amicable solution that does not involve lawsuits.
After all, shareholder agreements, laws, and regulations related to equity, and corporate governance policies can be quite complex. It can be quite challenging to determine the correct course of action that aligns with all applicable agreements, laws, regulations, and policies across various situations.
However, often, due to greed or differences in interpretation of the letter or spirit of the law, involved parties are forced to file lawsuits.
What are some important equity litigation cases in the history of America?
Some of the litigation cases that have reshaped the breadth and extent of shareholder rights and management duties in the USA are as follows.
Case | Description | Impact or significance |
---|---|---|
Dodge v. Ford (1919) | Ford Motor reduced its dividend in 1916 to benefit its employees and customers. | Shareholder primacy: Management must prioritize the benefit of shareholders over other stakeholders |
United States v. O’Hagan (1997) | O’Hagan misused material non-public information but was not an insider at the company. | Misappropriation of material non-public information is unlawful regardless of whether the person is an ‘insider’ or ‘outsider’ |
Basic Inc v. Levinson (1988) | Basic Inc. publicly denied an imminent merger, leading shareholders to sell their stakes at artificially low prices and causing them to forego any financial gains from the merger. | Fraud-on-the-market theory: Fraudulent statements can unfairly affect stock prices since stock prices incorporate material information. |
Smith v. Van Gorkom (1985) | Van Gorkom, the CEO and chairman of Trans Union, misled directors and shareholders by misrepresenting a low merger price as adequate. | Directors could be held personally liable for gross negligence. |
5 common types of equity litigation
As discussed earlier, equity litigation cases can occur when shareholder rights are violated or corporate duties are not fulfilled. Let us review some of the common types of equity litigation cases that you may come across.

Employee stock disputes
Equity compensation has become quite commonplace in America with 76% of HR leaders reporting the use of equity compensation in 2024. Unfortunately, this opens up a new avenue for litigation cases.
Equity compensation is taxed as per Section 409A of the Internal Revenue Code (IRC). Since organizations develop and administer compensation plans, they play a key role in Section 409A compliance. However, the instance of income tax and potential tax penalties falls on the employees and service providers since they are the ones receiving the financial benefit.
Hence, if a corporation shows negligence in following the guidelines of Section 409A, it may attract lawsuits from employees and other service providers who had to deal with higher tax liabilities for no fault of their own.
Mergers and acquisition disputes
The Smith v. Van Gorkom (1985) case that we discussed earlier is an example of merger and acquisition disputes. Here, the allegation was that the top management displayed gross negligence and failed to secure an appropriate price for the merger.
M&A disputes can also arise when the shareholders feel that the top management misused their power to force an M&A transaction.
For example, Tesla shareholders accused Elon Musk of coercing the board to acquire SolarCity in 2016 to recover his investment in the company. We must note that the courts ruled in favor of Elon Musk.
However, this case shows that shareholders may sometimes suspect abuse of power and conflicts of interest which leads to M&A-related equity litigation. M&A disputes can also result from shareholders outright disapproving of an M&A without any allegation or suspicion of conflicts of interest.
Insider trading claims
Insider trading is when a company’s employee, management personnel, or executive uses material non-public information to make unfair financial gains by trading the company’s securities. This is the type of information that is not known to the general public yet but provides crucial insights into the intrinsic value of a company’s stock.
Material non-public information could include yet to be announced:
- Earning results
- Information on mergers and acquisitions
- Appointment or termination of a major decision-maker
It is important to note that insider trading can be done by company insiders as well as family members, friends, and acquaintances tipped by the company insiders.
In a famous case of insider trading, R Foster Winans, a former Wall Street Journal reporter, was convicted for trading based on information that would later appear in his famous column called ‘Heard on the Wall Street’.
Securities class action lawsuits
Securities class action (SCA) lawsuits against a company are filed by investors who suffered losses because they traded the company’s securities in a particular period. For instance, a company may fail to disclose that its research and development (R&D) investments yielded a new, innovative, and high-revenue potential product.
If you sell off this company’s stake in the period when the product had been developed but was not announced, the sale would be at an amount lower than the intrinsic value of your stake. Either individually or after banding together with other investors who suffered a similar fate, you could file an SCA lawsuit alleging that failure to disclose key information led to missed profits.
Similarly, SCA lawsuits can also occur when investors suspect misrepresentation of data or other forms of fraud and deception.
Shareholder derivative lawsuits
When a company’s shareholders feel wronged by executives, management personnel, directors, or other insiders but the company itself doesn’t pursue legal action, its shareholders may file a shareholder derivative lawsuit on behalf of the company.
Typically, a company will not waste any time taking action against an insider that harms its shareholders. However, when the insider is highly placed in the organization structure and has significant sway over the company’s decision-making, shareholders may have to take matters into their own hands.
There have been a number of successful shareholder derivative lawsuits involving heavyweights like Yahoo, Tesla, McKesson Corp, and Pacific Gas and Electric Company.
In 2016, in the Wells Fargo fake account scandal, Wells Fargo employees were found to be creating fake accounts on behalf of customers to boost sales figures and qualify for bonuses. As a result, the shareholders filed a derivative lawsuit alleging that Wells Fargo’s directors failed to protect investors from the direct financial loss and the loss of trust arising out of this scandal. In one of the biggest settlements ever, the directors agreed to a $240 million settlement for this lawsuit.
Eqvista – Accurate valuations for effective advocacy!
When negotiations fail to address violations of shareholder rights or failure to perform corporate duty, shareholders may turn to equity litigations. Unfortunately, because of the high-stakes nature of shareholder rights violations, even unintentional breaches of shareholder rights can snowball into equity litigation.
Equity litigation cases have gathered a lot of attention since cases like Dodge v. Ford and Basic Inc. v. Levinson went on to reshape the American corporate governance landscape.
Some well-known types of equity litigation cases are securities class action lawsuits and shareholder derivative lawsuits. Misuse of material public information or inability to secure the right merger price can also result in lawsuits.
In employee stock option disputes, often, a key point of the dispute is whether a company’s valuation complied with Section 409A.
If you are involved in equity litigation where the accuracy and tax compliance of your valuations have come under question, you need not look further than Eqvista for litigation support. Our team has provided accurate and tax-compliant valuations for thousands of companies. Contact us to know more!
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