Lawsuits are an everyday risk in business. For example, U.S. lawnmower-engine-maker Briggs & Stratton Corp. (NYSE: BGG) recently paid US$18.7 million to settle a lawsuit that accused the company of using misleading labels on its lawnmower engines.
Last fall, an Ontario court ordered Great-West Lifeco Inc. (TSX: GWO) to pay $456 million in a class action lawsuit related to its 1997 takeover of London Life. The lawsuit accused Great-West of improperly using the money in London Life’s client accounts to fund the takeover. The company is now appealing the ruling.
The most high-profile recent Canadian example was Maple Leaf Foods Inc. (TSX: MFI), which had to pay $25 million to settle class action lawsuits after 21 people died of listeriosis (a form of food poisoning) after eating contaminated meat in 2008.
Shares of Briggs & Stratton and Great-West Lifeco were largely unaffected by their legal troubles. Maple Leaf fell sharply during the listeriosis outbreak, but it has since rebounded.
Here are a few ground rules for protecting yourself against lawsuits and other investment threats:
1. Invest mainly in well-established, dividend-paying companies. These firms are likely to survive any legal troubles that come along – and go on to thrive. Well-established companies often have strong brands that consumers trust. That’s a plus, because customers are more likely to stick with these companies when they run into trouble. Moreover, well-established firms have strong management that will act quickly when problems arise. That limits any long-term damage to their brands.
2. Diversify. Spread your money out across most, if not all, of the five main economic sectors (manufacturing and industry; resources and commodities; consumer; finance; and utilities).
Even if a company you own gets sued and loses half its value, more fortunate investments should leave you with a profit.
3. Set ethical standards. If you have any qualms about a company’s business practices, stay out of it, no matter how inviting it seems. Good companies lose lawsuits from time to time. But lawsuit or no, bad companies always wind up costing their investors money.
Our investment advice: Keep in mind that it’s much easier to file a lawsuit than to win an award, much less an award that stands up under appeal. Lawsuits are just one of many risks you face as an investor. In the course of an investing career, you’ll lose far more to bad investment judgment than to adverse court decisions.
Fundata Canada Inc. (www.fundata.com) is a leading source of Canadian mutual fund information.