Calculating Loss in Shareholder Claims

published May 24, 2013
One of the most fertile areas for debate in shareholder claims is in how to calculate loss caused by the contravention. Two options are what are known as the "constant percentage" method and the "constant dollar" method; the former measures "inflation" caused by the contravention as a constant percentage of the company's share price through the relevant period, while the latter measures "inflation" in constant dollar or cents terms.
One of the most fertile areas for debate in shareholder claims is in how to calculate loss caused by the contravention.

Two options are what are known as the "constant percentage" method and the "constant dollar" method; the former measures "inflation" caused by the contravention as a constant percentage of the company's share price through the relevant period, while the latter measures "inflation" in constant dollar or cents terms.

Each method can result in materially different loss calculations to the other, with plaintiff lawyers preferring to argue the constant percentage method in a falling market.

It is best to explain each method by way of example. Assume two investors, A purchasing 200 shares in company C on Monday for $200 and B purchasing 200 shares on Tuesday but paying $100 for reasons unrelated to any contravention. Finally, assume the company's share price dropped to $0.50 on Wednesday due entirely to the corrective disclosure.

The constant dollar approach calculates inflation at $0.50 for both A and B, whereas the constant percentage approach identifies the fifty percent drop when the disclosure occurs and applies that percentage to the stock price throughout the entire class period. Accordingly, under the constant percentage approach, A's damages would be $100 (50% of $200) and B's damages would be $50 (50% of $100).

Proponents of the constant percentage method argue that the market reacts to news in percentage, not dollar, terms. Opponents argue that the constant percentage method is inconsistent with the concept of loss causation. Not only does A get to recover damages ($100) that are greater than B's damages ($50), even though they were exposed to the identical contravention, A's damages are greater than the actual dollar drop associated with the full disclosure of the contravention.

Participants at IMF's Shareholder Conference on 17 November 2011 will hear Stephen Gageler SC speak on the constant percentage method of calculating loss.