Wednesday, April 21, 2010

Toyota Still Under Fire As Shareholders File Lawsuits Against The Auto Giant

After recalling more than eight million vehicles worldwide due to sudden unintended acceleration, Toyota Motor Corporation is now facing a host of lawsuits from the company’s shareholders and individuals impacted by the recalls. In at least three class-action lawsuits, shareholders are suing over the dramatic drop in Toyota’s stock price, arguing that company executives gave investors and the public false assurances that the sudden acceleration issue was easily fixable and intentionally misrepresented the depth of the problems. Moreover, shareholders contend, Toyota executives knew for almost a decade that faulty throttle controls caused the cars to swerve out of control, but that the executives breached their duty to disclose truthful information and covered up the defective design through press releases, conference calls, and interviews with stock analysts. This deception resulted in a false reputation of safety and artificially inflated Toyota’s stock price.

As of early March 2010, Toyota’s stock price fell nearly 16 percent, from its price of $90 on January 21, 2010. Although the stock rebounded in mid-March to nearly $80, the price decrease caused shareholders to potentially lose millions of dollars. Additionally, Toyota’s total U.S. market capitalization fell 13 percent to $136 billion after the sticky pedal recall in January 2010.
The lawsuits come as Toyota desperately works to regain public confidence in the wake of one of the nation’s largest auto recalls. If Toyota is found liable, it could face billions of dollars in damages. Toyota does however, have case precedent to argue from. In 2001, Ford Motor Company won its product liability lawsuit against investors who alleged that the company deliberately misled the public about the safety of its Explorer vehicle prior to a massive tire recall. A federal judge held that Ford could not reasonably foresee the impact of the recall when it made the public statements. Toyota shareholders likely face an up hill battle to hold Toyota liable for its disclosures concerning defective cars.

26 comments:

  1. It is extremely unfortunate that the shareholders of Toyota were placed in such a predicament. It will be quite interesting to see how each of the class action suits play out. I think the shareholders have a strong argument for a breach of duty of care claim, and may be able to argue that Toyota cannot apply the business judgment rule. How could faulty products be to the benefit of the corporation? Also, whereas the court found in Ford's favor in the suit regarding the product liability, the case may not be directly on point. The shareholders could probably argue that although Ford could not foreseeably see the impact of the recall when it made the public statements, Toyota could have. In fact, they may be able to even claim that Ford was the perfect example of the potential impact. Toyota shareholders may have an up hill battle, but the battle is not completely lost.

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  2. I find this article most appropriate because it relates directly to the topic of derivative suits covered in our Business Association class. It also addresses the issue of 'duty of care' for the directors and officers. This seems to be a clear case where the directors and officers may have breached their duty of care as a result of their inaction to correct the faulty parts of their vehicles. While Toyota may have some case law to work with, I believe the instant case will be distinguished. By distinguishing whatever case law Toyota has in its favor, I can most certainly see the plaintiffs prevailing, in this case, the shareholders. It will certainly be interesting to see how this case plays out in the legal system and be able to see a real life situation applied to a classroom lesson.

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  3. There were wispers of this problem for many months before Toyota came public with their problems. The real issue is that there was a conscious attempt to cover up these problems and avoid liability.

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  4. Appropriately, Toyota's credit rating was cut today from Aa1 to Aa2 which will impact Toyota's borrowing costs. Add to that the three derivative lawsuits, over 180 consumer suits, and nearly $2 billion in lost sales and its hard to imagine that Toyata's net income will be anywhere near its predictions of $862 million dollars. And to top things off, Toyota also recalled its Lexus GS 460, and has been fined over $16 million dollars by the U.S. alone this year.
    What I am having trouble with the most though is the shareholders' contention that "Toyota executives knew for almost a decade that faulty throttle controls caused the cars to swerve out of control, but that the executives breached their duty to disclose truthful information and covered up the defective design through press releases, conference calls, and interviews with stock analysts" - First becuase, if this were true, how stupid could these executives be trying to hide dangerous defects for over 10 years instead of attempting to correct the problem? Seriously, how long did they think that could go on without being uncovered? And second, because I don't believe these executives are stupid, if Toyota did try to repair the defects, is it really possible that it made absolutely no progress in over 10 years, that these same problems still persist today?

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  5. I agree Ms. Canada, that it is unfortunate for the owners of the cars. Toyota owners suing the company contend their vehicles have dropped in value because of the recalls and that Toyota knew all along about safety problems but concealed them from buyers. This is piggybacking off of what Ms. Isaac said. There could be millions of people that are owed smaller amounts of money, not just the one large law suit. Apparently there are over 200 people in the class action suit and about 100 more expected to join. Also, the National Highway Traffic Admin has linked over 52 deaths to car defects, particularly acceleration problems. The sad part is that Toyota is still adamantly denying the claims, but you never know the approach you would take until you get into that situation, it may have been decided that it was their best strategy.
    Tiffany Smith

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  6. Now is the right time to buy a toyota for your favorite foe. What will you get charged with????attempted murder? Its very unfortunate that Toyota will betray the trust the US public had in them. It's time for Ford to seize this opportunity, and turn into a household name.

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  7. This seems to be the perfect example of a class action law suit, because it involves a class of shareholders asserting personal claims and nobody is asserting a claim on behalf of the company. I think the shareholders would have a strong "duty of care" because the Board of Directors had a legal obligation to adhere to a reasonable standard of care while performing any acts that could foreseeably harm others. By sweeping the break pad issues under the rug and not being up front with the shareholders, they did cause harm, and should have used better judgment.

    -Turner Sothoron

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  8. The issue with Toyota vehicles is particularly important to me because I just bought one of their cars and found out months later about their issues. Toyota is an excellent carmaker and it is my personal belief that they mislead the public in order to maintain this reputation. After I found out about the recall I did some researching and found numerous reports where owners of Toyotas tried to alert the company about the problem several years ago. However, because Toyota could not figure out the problem, they chose to ignore the complaints and treat them as isolated events. This fact is inexcusable to me. It is upsetting to hear that a company would be so interested in maintaining good sales that they would allow people to die. Additionally, after the recall was announced Toyota was extremely slow in providing a solution to the problem. When the solution was available, Toyota was ONLY fixing new cars at dealerships and factories and not cars that were already purchased and on the road. Yet again, Toyota was still concerned with trying to sell cars and make money rather than protect the public. With these facts in mind, I truly hope that Toyota will be held liable for their actions.

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  9. Mercedes PinckneyApril 23, 2010 at 9:31 PM

    This looks like a huge duty of care claim. The directors of Toyota should have known better than to keep ignoring the design defects. They obviously did not act in good faith or in the best interest of the corporation. If the directors did not disclose the problems only to maintain the company's reputation, their reputation is long gone at this point. By continuing to ignore and mislead the public, the company may be forced to pay out billions of dollars. Now that's a waste of corporate assets!

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  10. This is an unfortunate situation for Toyota. The automotive industry has already taken a substantial hit throughout this rough economic downturn in the United States. Now Toyota is faced with dealing with the faulty car problem. I think what is more disturbing is that Toyota was aware of the problems for quite some time and gave false information to the public regarding the severity of the issue. It can make some people feel as if we have placed the all might dollar above the value of a human’s life. The car maker was well aware that injuries might result, and now the company is left with the task to explain how or why they haven’t made any substantial changes faster to rectify the problem. Toyota was definitely one of the most favored cars here in the United States and now, it seems that other makers are capitalizing on this mistake. I hope everything works out for Toyota in the future.
    -David H. Kenton

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  11. I think Toyota will argue that they were acting in the best interests of the corporation and the shareholders because they could not have foreseen how serious this problem would be or how many people it would have affected. They probably thought that initiating a recall based on a few complaints would cause their stock price and reputation for great cars to go down and thus it would not be in anyone's best interest. Now that this has become such a big ordeal, they might lose the argument but it could be a good attempt.

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  12. Meredith SullivanApril 24, 2010 at 1:26 AM

    This situation was clearly handled poorly by Toyota. I believe that the shareholders have a good argument that Toyota breached its duty of care by failing to act in good faith and in the best interest of the corporation. Toyota will likely argue that it is protected by the business judgment rule, and that its decisions were made in the best interest of the corporation. Courts give high deference to corporations and presume that its directors are acting in the corporation’s best interest. But even if the shareholders overcome this presumption, they will further have to prove causation between Toyota’s board’s decision and the plummeting stock prices, something which may be difficult to prove.

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  13. I agree with Ms. Sullivan. I believe that the board of directors for Toyota breach their duty of care. If the board had information that the brake systems was faulty, and failed to act on this information, they clearly were not acting in good faith nor were they acting in the best interest of the corporation. They were misleading the shareholders and placing their company in a potential financial crisis. I am sure that the board will argue that their decision is protected by the business judgment rule, but this argument will most likely fail based on the previous discussion.

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  14. My last car was a Toyota and I completely lost control of the car one day, my car spun out of control and I couldn't control the wheel, leading my car to crash into a tree...luckily I was okay but now this explains it all. I agree that Toyota executives had a duty to disclose to its shareholders about these faulty throttle controls. I definetely see a breach of duty of care here with no possible defense of the business judgment rule. The shareholders could bring a derivative suit on behalf of Toyota and could possibly be successful.

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  15. My last car was a Toyota and one day I lost control of the steering wheel while I was making a turn in the mall area and it completely spun out of control leading me to crash into a tree...luckily I was okay but this explains it all. I see a possible duty of care breach here for failure to disclose and no business judgment rule defense. I think the shareholders could possibly bring a successful derivative suit on behalf of Toyota.

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  16. In my opinion, the entire recall situation that Toyota is currently facing will continue to affect Toyota stock for years to come. Personally, I am in the market for a new car next year and previously Toyota was on the list. However, as a consumer I cannot help but to be concerned about the safety of their vehicles. Obviously, it is not just me. Toyota is working hard to restore it's image with the recent commercials attempting to convey to the consumer how much they care; sounds like too little too late to me. Perhaps if Toyota really "cared" about the consumer they would have fixed the problems with their vehicles a while ago. It is going to take much more than a sentimental commercial to restore my faith in Toyota.

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  17. I would not want to be a Toyota shareholder right now.
    Although they are making great strides to correct their problems, the issues Toyota had are unacceptable for a major car producer.
    However, the stock will likely continue to fall and will only go up in the future due to the fuel efficient vehicles and the need for those vehicles worldwide.
    Although a bad situation, it's a goo one for prospective Toyota stock buyers.

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  18. Michael RosenbergApril 28, 2010 at 9:37 AM

    The shareholders should sue. I would be furious at the company that I had invested in knew that the parts that they were installing in cars were defective. This lawsuit will be important in order to get this information public. The information that will be obtained during discovery will either show that Toyota acted in good faith when they made this decision, or whether the board members breached their fiduciary duties.

    It's too bad that companies are cutting corners and the consumers have to pay a deadly price for any savings. I would pay an extra $1000 to ensure that everything was installed / working in good order, rather than accelerate at 100mph with no possibility for stopping.

    If I wanted that kind of thrill, I'd head to Disney World.

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  19. As I was reading this post, I began thinking more & more that the shareholders have a solid claim against the automaker. This reeks of corporate misconduct that cost shareholders A LOT of $$. However, I'm always hesitant that a major company like Toyota (the world's largest auto manufacturer) would ever be found liable for such misrepresentations to the public. My suspicions were vindicated when Ms. Barclift included the paragraph about Ford Motor Co's successful defense against investors - in a lawsuit that sounds very similar to this one. This precedent should serve Toyota well. I would be surprised if the automaker pays a cent to its shareholders, let alone billions of dollars.

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  20. Candace Cronan

    Ford and Toyota are difficult comparisons but I think Toyota's shareholders may have a strong case. In particular, Toyota's response to the ordeal (the almost ridiculous commercials on TV with people saying "I love Toyota") is not the way to make things right. People want to know why and they want to hear it from Toyota's officers and directors-- not some senseless TV advertisement that is simply wasting the corporation's money.

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  21. -Anthony Gonzalez

    Ok so when it comes to the corporation that goes by the name Toyota, as of this year alone we've become familiar with the following topics: "sticky pedals," "unintentional sudden acceleration," and as of 2 hours ago they have now recalled more vehicles because of a problem with the "vehicle stability control system."
    I have one word (3 times)for the shareholders, SUE SUE SUE! and then two more words, JUMP SHIP!

    No question about it, Toyota is getting it hard, but rightfully so. If you are an auto manufacturer and you cannot manufacture a good, reliable, and safe product then you deserve to be held liable for the damages.
    If the shareholders are able to prove that Toyota knew about these problems and disclosed to the contrary, then you're looking at the following issues: breach of fiduciary duty (due care), misleading/omitting material facts, disclosure, good faith, and at that point you're probably just getting started.

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  22. It’s unbelievably scary that Toyota knew about its defective throttle controls for almost ten years, and did nothing but lie, deceive, and manipulate the information it disclosed to the public. Maximizing profits is one thing, but doing on the back of my family member is another story. It would have been cheaper and easier if Toyota just fixed the problem when it knew about it. A pay-out for a wrongful death claim or some other tort claim where a person gets injured would have probably cost millions and caused less PR damage than these potentially billion dollar class-action lawsuits with potentially millions of individual car owners.

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  23. Toyota will, most likely, make the same claim Ford did in the 2001lawsuit, that they could not foresee the potential severity of the problem. Although, if the allegations that the malfunction was known for several years, are true, Toyota will be hard pressed to find anyone to buy that argument. Toyota will claim that the actions taken by the company were in the best interest of the shareholders but I have a feeling that will not be enough to save them from their shareholders when it comes time for trial. It is unfortunate that Toyota’s poor decision has caused deadly consequences. Fortunately I am not a Toyota shareholder but unfortunately I drive a Toyota.

    - Jonathan Haskell

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  24. This seems like an opportunity to take a strong approach to disclosure, transparency, and accountability of corporate actors. Hopefully the courts can see it as such and implement a higher standard of care that is owed by officers and directors. The publicity of this case will bring light to the issue and expand the duties of the executives of a corporation.

    On a side note, it will be very interesting to see how the government will try to regulate Toyota because as an owner of GM, it would be a relevant conflict of interest involved.

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  25. Why are we talking about suing Toyota. Do not misunderstand me. I think what they have allegedly done to be wrong. That being said, I think there is a certain number of companies that should be sued before Toyota. I think that since Toyota is one of the few foreign companies that is at least diminishing the trade deficit we can afford to be a little more lenient. Let's focus on the people who have forced a decade worth of lost growth on the US. The first words out of every American's mouth everyday should be "sue the banks; put them in jail." Without this mantra we will constantly be distracted with new forms of corporate misconduct. Its seems mundane to say fix one wrong at a time, but maybe that is what we need to do.

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  26. I almost have to question the U.S government's intentions if they decide to sue Toyota. I say this because the government is now a market participator,i.e, owns half of GM. Don't get me wrong, I agree that they should be regulated and fined, but at this time I thik Toyota is going to get the brunt of he government stick. It made itself an easy target, especially at this time when the government is cracking down on corporations.

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