Todd Zywicki - Are Lawsuits Killing Public Companies?

The number of publicly traded companies in America has collapsed over the past few decades and some experts say lawsuits and legal pressure are a major reason why. As fewer companies go public, everyday investors may be losing access to opportunities once available through the stock market.

George Mason law professor Todd Zywicki joins the program to explain what’s driving the decline and whether America’s legal system is pushing businesses away from public markets.

Transcript

SPEAKER_01 0:02

Welcome back to the Lars Larson Show. A George Mason law school professor says there's a quiet war being waged on American companies. Are lawyers the reason your 401 has fewer companies for you to invest in? And what's behind the drop in U.S. public companies? Todd Zoicki joins me now, law professor at George Mason University's Antonin Scalia Law School. Professor, welcome back to the program.

SPEAKER_02 0:28

It's great to be with you again, Lars.

SPEAKER_01 0:30

Well, why has the number of publicly traded companies, and by that, so if people are listening and they wonder what's a publicly traded company, a company in which you can buy stock and the stock is sold or bought uh on the various exchanges, why has the number dropped?

SPEAKER_02 0:45

Yeah, this is what's crazy, Lars. The situation is so bad uh and the availability of public companies has gotten so rare that there's something called the Wilshire 5000 index, which was created in the 1970s when there were about 7,000 public companies and it was supposed to hold sort of all of the stocks uh of like a very wide base of American stocks. Today the Wilshire 5000 only has 3,700 companies because that's all that's left. Uh we've seen this reduce in half over the last 50 years at the very same time that more and more and more Americans are are owning stocks. And so we've got this real problem uh where uh a lot of us are are having more and more trouble sharing in the fruits of American capitalism and investing in these. And one of the big reasons is um our are runaway securities class action uh cases. And what you get, I'm I'm sure we've all seen these, right, where a class action lawyer will pounce on a company that just has a blip in their stock, sue them, shake them down for millions of dollars. That the lawyers get millions of dollars, and uh the rest of us get a couple cents if uh if anything. Uh and so a lot of companies are just saying, forget it, it's not worth the litigation risk, it's not worth the litigation cost uh to uh to deal with uh with these uh these lawyers. We'll just stay private or we'll go private, like a lot of companies.

SPEAKER_01 2:06

Well, and Professor, I heard uh what was the big change, and it was within, I think, the last 20 years, that just to go public was multiple millions of dollars. And I remember being described to me as, you know, a company says, hey, we've grown to this point, let's go public so we can raise some money to go out and buy more plant and equipment and expand what we're doing. And their lawyers say, well, it's gonna cost you three or four million dollars to file just the paperwork to go public. So if you raise seven million dollars, over half of it is gonna go just into the legal process. Is that kind of thing necessary in this day and age?

SPEAKER_02 2:44

No, it it really isn't. And you've described the problem exactly right, Lars, which is traditionally what would happen is somebody would come up with a good idea, they'd start to grow the company. You maybe they'd be Home Depot and they'd have three or four stores. Somebody says, hey, this is a great idea, let's go to 300 or 400 stores, right? But that takes a lot of capital.

SPEAKER_00 3:03

That's going to take a lot of cash.

SPEAKER_02 3:06

Yeah, and so that's why you would issue uh you would issue public stock. But like you said, uh regulations like uh um uh Sarbanes Oxley, the litigation risk uh that we're describing here. One of the other things we've seen has become a real problem in recent years is all these, you know, like California saddled all these public companies with all these DEI and ESG requirements, right? Uh who can be on their board, you know, all the ESG things that are were just a great big waste of money. Um and private companies don't have to deal with a lot of that stuff either. And so they've basically um kind of killed the goose that lays the golden egg, right? The fruits of capitalism that we were able to uh uh, you know, that so many people were able to share in, uh, our parents were able to share in, even potentially, and now there's just fewer and fewer and fewer of them. And so they've they've kind of exacerbated this fact where only the very wealthy can get investments in these private companies, hedge funds, private equity, that sort of thing. The rest of us are squeezed out.

SPEAKER_01 4:05

Professor, uh, I'm talking to Todd Zwicki, who's a law professor at George Mason University at the uh Antill Anton Scalia Law School. So is there any simple way to simplify that whole process so that we can make IPOs and publicly held companies uh you know popular again?

SPEAKER_02 4:23

Yeah, well, I I hope so. What I what prompted me to write this article, this particular article that appeared in the Washington Post, um, and people can find a link to it on my Twitter feed at uh at Todd Zawiki. Uh what prompted this, there was a case before the Supreme Court, and it's this crazy case out of Delaware. And basically what you had was this situation with Johnson Johnson where there were a bunch of lawyers suing Johnson Johnson on tech, right? Uh baby powder. Yeah. And then there were these other group of class action lawyers who just were pouncing on what the first group of uh lawyers were doing and saying that um when those guys would bring a new suit, they would just pretend like that's what caused Johnson Johnson's stock to fall without ever having to prove it. And the Third Circuit allowed this case to go forward. They basically didn't require them to show that there was new information provided by a new lawsuit. They were just basically recycling press releases. And what's craziest, one of the things they pointed to is the fact that more court lawyers had filed the seed the company. So it's this sort of reciprocal sort of circular thing between the trial lawyers, uh the tort lawyers, and the class action lawyers. And what I was hoping was the Supreme Court would take it on cert that they would shut that down. There are things that could be done with that. Unfortunately, the Supreme Court denied cert, and so that issue is going to still be percolating out there, but hopefully it'll be cleared up in the future.

SPEAKER_01 5:44

Any way we can get the Supreme Court to have a better work ethic? Because, Professor, I'm not a lawyer. You you know I'm not, you are. But I look at these guys and it sounds like, yeah, we've got all these uh clerks that do a lot of the work for us. We've got all this new technology that makes background in cases shepherd or whatever you call it. Uh and it's that's a lot easier. And we're taking on fewer and fewer cases, which sounds like the nine justices saying, yeah, we'd like a job where we just uh constantly work less and less every year.

SPEAKER_02 6:15

Yeah, and you know, and these are these are the cases that kind of keep the country running, right? You know, everybody focuses on abortion and you know things, and those are all very important, right? But this is a case in which the Supreme Court and Congressman need to get involved. Why? Because the Third Circuit includes the state of Delaware, and as your listeners may know, overwhelmingly most uh the big corporations in America are headquartered in Delaware. And so now you can basically, these trial lawyers can basically run this same play over and over again against every big company and just shake them down like this. And so uh the Supreme Court turned it down this time, but hopefully they'll have an opportunity very uh soon again, because otherwise this problem's gonna just keep getting worse, and more and more companies are gonna stay private or go private to avoid uh these predatory uh class actions.

SPEAKER_01 7:05

I mean, because Todd, the the thing I think about, Professor, is that you know, if you had that brilliant idea and you say, but when we get to the point where you you gotta have a big pile of cash to be able to go out and actually make it happen, even if you have the best innovation in the world, and then you say, well, I want to raise that money by going public, and I want to do so in a way that is fair to the people who want to buy in and get a piece of the American dream. Say, I want to own a hundred shares of this. You know, Professor, I went back and looked up because I was curious. If I had put$1,000 in Microsoft stock back in uh the mid-1980s, I think it was 86 when they went public, it'd be$4 million today. And you think a thousand bucks, I mean a thousand bucks back in the mid-80s becomes four million dollars today. That that is, you know, and that's just saying, you know, you you bet on the right company and you say this company is gonna go somewhere, you've got the right instinct, and they do. And when they do, they take you with them. That is Todd Zwicki. He is a law professor at George Mason University's Antonin's Glea Law School. Professor, it's always a pleasure to have you on the program. Back in just a moment, glad to get your calls at 866-HLARS. That's 866-439-5277. Send your emails to talk at LarsLarson.com and check me out on Instagram as well.