[hn_throwaway_99]

This seems totally insane to me. The lawsuit is arguing that directors not only have a fiduciary responsibility to shareholders to increase the value of their Meta holdings, but also of other stocks they may own.

The consequences of that line of thinking are scary. I'm sure the vast majority of shareholders of most US companies own ICE cars. If a company decides to put a lot of effort into, for example, cheaper batteries, could shareholders sue because the company is devaluing an asset most of them own?

This totally smells like a lawyer trying a random, BS theory in the hope that something "sticks" in order to make their mark.

[pevey]

I think what they are really trying to do here is come up with a legal theory that internalizes what economists call "externalities." One economic actor, in doing what is in its individual best interest, creates negative effects that may be much, much larger than the positive effects.

We're not talking about Coke taking market share from Pepsi, which is analogy I saw elsewhere. A better analogy would be Company A that doubles its own profit by, say, destroying the public shared water source 5 other companies rely on, with total profits 10x the extra profits for Company A. So the overall portfolio effect of the actions is very negative.

For many years, economists have just sort of accepted that externalities are a thing, and are bad, and there is not much you can do about them. By definition, you can't hold companies accountable for these costs. If you could, they would not be externalities. This suit is trying a new legal theory to change that.

IANAL

[celestialcheese]

You could make this argument that Apple has done this with their IDFA changes. Wipe out the public water source (data attribution) to benefit their internal apple ads (new DSP + Apple app and search ads). Overall portfolio effect of that IDFA change has been extremely negative for every company but Apple.

Should I as a shareholder of both Apple, Meta and Google be able to sue Apple for their changes?

[msh]

You could just as well argue that apple have done a public good by preventing pullution (data sharing) by other companies.

[hn_throwaway_99]

All of these arguments pretty much point to the absurdity of this lawsuit. It's not hard to pull lots of different second order consequences out of your ass and then point to some big, societally impacting company as the source of whatever consequence (good or bad) you can dream up.

[civilized]

It's nice that the lawyer may have good intentions, but the legal theory is still crackpot.

I don't cheer for silly legal theories to prevail just because of good intentions. The unintended consequences of silly legal theories prevailing are likely to be higher than any good achieved in this one instance.

[pevey]

I haven't given it a lot of thought, but I tend to agree with you. The sister comment to your comment (about AAPL and it's tracking/privacy changes and the effects on other companies) is a good example why. Some externalities may be realized as effects on other companies that may be part of a portfolio, but some may not be. For example, what about how users value their privacy?

It's a very interesting legal approach, but that doesn't make it right. Externalities are very tricky.

[sam345]

Normally the lawyers in these cases have one of either 2 motives - 1) idealogical (will pursue theses cases to push a political point so as to influence/intimidate others and to develop a political policy down the line) or 2) Financial. And if all things go well they get both done. Whether or not these intentions are good probably depends on whether you think freer markets should be allowed or not. Or whether they should be governed by idealogy pushing the money to one side of the political spectrum or another.

[gfaster]

How nice would it be if corporations were held accountable for externalities? You'd almost immediately have all the big fossil fuel companies, automotive manufacturers, and likely banks sued into oblivion for defrauding shareholders.

IANAL, but I don't think this will hold up.

[seanhunter]

There is a theory in economics that the government could do this by imposing taxes on negative externalities.[1] The purpose of these "Pigovian taxes" is to make society whole for these negative externalities and ensure that over time the prices of goods reflect their total marginal costs, not just the direct costs to the producer. Of course there are practical problems in estimating the right level for these taxes accurately.

[1] https://www.economicshelp.org/blog/glossary/pigovian-tax/

[WastingMyTime89]

It’s not a theory for any meaningful sense of the word theory. The government could indeed price in externalities through taxes if it so desired. Also it’s not “Pigovian taxes”, it’s just Pigovian taxes. That’s exactly what a Pigovian tax is. No need for quotes here.

Taxes are regularly used to encourage or discourage investments. The fact that no government does is a political one.

[seanhunter]

To be clear, when I say theory, the theoretical part is not that these taxes could exist but that the tax could adequately price in negative externalities, which is hard because generally price discovery is hard to do and in particular one of the things about the negative externalities of lots of activities is they are not fully known at the time the goods are produced. eg when the would was going ham producing asbestos it was probably not fully appreciated quite how harmful that was. So lots of the information which would be the raw material for that price discovery is unavailable.

Governments do sometimes impose pigovian taxes and as you say, this can be politically unpopular which is why they don’t always stick. For example, in the UK there was the “fuel price escalator” which was a direct response to climate change. The government decided to impose a tax on retail petrol and diesel prices that would rise in line with inflation or faster to encourage people to move away from fossil fuels over time. It led to a weird uprising where truck drivers picketed oil depots and the country ran out of fuel so the escalator was abandoned.[1]

[1] https://en.wikipedia.org/wiki/Fuel_protests_in_the_United_Ki...

[drewm1980]

There is a documentary called "Duty of Care" about lawsuits along these lines. Governments are getting sued for endangering their own citizens through inaction on climate change. Similar lawsuits are being brought directly against oil companies.

[jbombadil]

> This seems totally insane to me. The lawsuit is arguing that directors not only have a fiduciary responsibility to shareholders to increase the value of their Meta holdings, but also of other stocks they may own.

This is my thinking as well. If I own stock of Coca Cola and Pepsi. Coca Cola comes up with a great product that eats a huge amount of market from Pepsi. According to this I sue Coca Cola for my losses on the Pepsi stock?

[Kranar]

I don't think this lawsuit has much merit, but the lawsuit is arguing against damages to an overall portfolio. If a diversified portfolio consisting of Coca Cola and Pepsi was on the whole damaged due to the actions of Coca Cola against Pepsi, then the plaintiffs argue that Coca Cola would be liable for some part of that damage.

If, however, Coca Cola's actions harmed Pepsi specifically but benefited the overall portfolio, then no damages would be pursued.

So Coca Cola is welcome to take market share from Pepsi so long as doing so is a net benefit to a diversified portfolio, as opposed to doing so in a way that harms a diversified portfolio.

[donmcronald]

That’s insane! Imagine if a small company invented a cure for cancer. Would they be liable for the losses of all the pharmaceutical companies?

It would be the end of innovation.

[chowells]

No, because they would present massive gains to every industry that loses employees to cancer. That's all of them, by the way. There would be no net loss, and innovation would continue to be rewarded.

What would no longer be rewarded is parasitism.

[ClumsyPilot]

If companies were that concerned about loosing employees, companies like deliveroo and amazon would not be destroying their health. Coal minin conoanies would not need health and safety regulation - they used to literally kill their workers

[Kranar]

I know I should interpret every comment in good faith, but it really is hard to understand how you can read my comment and make such a reply. It feels like you didn't actually take the time to understand what I said or even read the article before commenting.

At any rate, if a company found a cure for cancer the stock market would absolutely skyrocket in a way almost never before seen. It's unbelievably hard to imagine how a company finding a cure for cancer would be to the detriment to a diversified portfolio.

[arjvik]

What's to say the stock market would skyrocket? Especially if this cure is accessible to everyone and published freely online, the only direct effect is pharma companies stocks crashing because of a loss of oncology drug revenue. Who's to say what the rest of the stock market would to to react?

Even if it's a tossup, does that mean there's a 50% chance of the inventor of such a cure being liable for that crash?

[pacerier]

It doesn't work like this. If it's a tossup (ie probability =~1:1) then there's no legal liability. Importantly, whether the cat's dead or alive is irrelevant.

The issue here is that it's not a tossup. The probability is >=2:1 hence the liability, even if that is alive after the plunge.

[jbombadil]

Legit question: is it "detriment to a generic diversified portfolio" or "detriment to a specific diversified portfolio"? (As in if my portfolio is diversified and it got decreased in value I have grounds to sue)

[Kranar]

The complaint in the article says that Meta is required to consider the impact of its actions on the diversified portfolios held by its shareholders. The plaintiff asserts that it's not about having a detrimental impact on a generic diversified portfolio but rather the various diversified portfolios held by its shareholders.

The specific complaint is that Meta ignored the concerns raised by its shareholders about the impact of its actions on the broader portfolios held by its shareholders.

Once again I do not think this case has merit, and lawsuits of this nature almost always fail, but we should at least take some time to understand what is actually being pled so that we can object to it with a firm standing.

[JohnJamesRambo]

>The complaint alleges that the Meta directors failed to consider that shareholders with diversified portfolios may be subject to net losses from Meta’s pursuit of a business model that maximizes advertising revenue without regard to the harms it inflicts on the rest of their portfolios.

This is one of the craziest stances/lawsuits I’ve ever read. Boglehead thought has taken over so much that the shareholders are referring to a nebulous diversified portfolio as something that somehow must be protected by law. That’s too far out there.

[evrydayhustling]

What is a diversified portfolio? Most indices are weighted by market cap, since everything else requires trading. So do we all the owe the most protection to the largest companies?

The idea is deeply deeply broken, essentially, "everyone should care about everything according to some notion of a portfolio i think is normal".

[nanidin]

The idea is counter to competition.

[syrrim]

It's an interesting perspective. There's probably a sense in which overall improving a diversified portfolio maps to improving society or the economy as a whole, rather than harming society to make a dollar. So whereas the lawsuit likely has no grounds, it might actually be a good thing if this was the way things worked.

[dpatterbee]

I think equating (or even correlating) the market value of some stocks with "improving society" is a pretty big reach.

[syrrim]

At the very least, it maps a lot more closely than does the market value of a single stock.

[zeckalpha]

If the decrease in value to Pepsi is less than the gains in Coca Cola, then yes, by the logic of this suit. However, I'd Coca Cola gains more than the loss to Pepsi, then no need to sue.

[divbzero]

The alleged harm caused by Meta may have a lot of merit, but the portfolio argument seems insane to me too. This line of reasoning suggests that companies have a fiduciary responsibility to avoid competing too hard against competitors because they share common owners. Anticompetitive effects have already been a concern due to common ownership by index funds [1] and would be exacerbated if this portfolio argument becomes a legal standard.

[1]: https://corpgov.law.harvard.edu/2019/03/11/the-strategies-of...

[mlazos]

What you’re saying makes sense but I actually agree with the intent. They’re basically saying don’t destroy the government/society in the name of shareholder value. I feel like there should be a way to say this without saying “because our portfolio value!” But that’s the justification they want to try.

[sam345]

Agreed. Totally insane - you might as well have the stock exchanges fold up and go home. What's the point in raising money in the capital markets if you are going to be subject to such silly lawsuits. Hopefully this will be thrown out quickly in the courts.

[yarg]

It also sounds like an intractable optimisation problem.

[kmeisthax]

Alternatively it could be an argumentum ad absurdum against the concept of shareholder primacy.

[taneq]

It's like a Lotto winner suing Lotto because their other ticket lost.

[socialismisok]

This is where capitalism naturally goes. Growth is the most important thing. We start to codify the expectation of growth into board responsibilities. Then we all accept that as normal. Once we've built the mental model there, it's not really that far to say they shouldn't hurt other companies if it costs them nothing.

[gregw134]

Except, we should want companies to compete with each other and eat each other's profits. Wars between companies are good for consumers.

[contravariant]

Competition is good, wars are only good if they don't end up producing a victor.