Tax Case Sparks Shareholder Derivative Suit

A company never litigates in a vacuum: statements in pleadings or court papers and testimony by company officials can be used against the company in parallel or subsequent proceedings, even unrelated cases. Eaton Corporation PLC was sued recently for alleged violations of federal securities laws because one of its officers made an admission on an earnings call that provisions of federal tax law barred Eaton from making tax-free spinoffs for a limited period of time, and the company's prior statements allegedly suggested such spin-offs could occur. Eaton Corp. Sued Over Statements About Post-Inversion Spinoff. Companies make similar statements in litigation on a regular basis. Often, such statements form a necessary component of a company's litigation position. Nevertheless, companies should carefully consider the risk that a statement will expose it to a shareholder-derivative lawsuit and incorporate that risk into its litigation strategy.