Punitive Damages and Investors

Punitive damages can be defined as a court awarded sum that is considerably or greatly higher than the measurable value of the injury.  Punitive damages are meant, not to compensate the aggrieved party, but to punish the offending party for its allegedly reckless or unconscionable actions or conduct.

Without attempting to resolve the differing views regarding the concept of punitive damages, it is important to recognize that punitive damages directed at a corporation, may, to some degree, fail to penalize the perpetrators while imposing the bulk of the costs on shareholders.

The recently announced compensation plan developed by Kenneth Feinberg at General Motor’s behest is an interesting case in point.  Based on recent press reports, it appears that the Feinberg plan is intended to compensate victims of GM’s ignition switch failures, in manner consistent with similar tragedies, with the added intent of erring on the side of generosity.  The plan is intended to provide timely compensation for actual damages, and keep as many claimants as possible out of the tort system (recovering losses in a lawsuit).  While the plan does include some compensation for pain and suffering, punitive damages are not part of the equation.

At this time, the company has not published any estimate of the total cost, but is not placing any limits on Mr. Feinberg’s assessment of just compensation based on the particular circumstances of each injured party’s claim.  Most observers expect the aggregate cost to GM to be measured in billions of dollars, which will be bourn by GM’s current shareholders.  This is interesting, as most of the problems leading to the claims to be addressed under Mr. Feinberg’s plan, were incurred prior to GM’s bankruptcy, which in turn substantially wiped out GM’s previous investors.

Some claimants and their attorneys have indicated that they do not currently intend to settle for the damages available under the plan, but intend to sue in pursuit of a very large award through the punitive damage process.  To the extent that this strategy succeeds, the increased costs will be borne by GM’s current shareholders, not the “old GM”.

Investors should recognize that, by and large, shareholders ultimately bear the costs of litigation.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA