Resetting the Baseline of Ownership: Takings and Investor Expectations After the Bailouts

During the economic crisis that began in 2008, the federal government nationalized several of the nation’s most significant private companies as part of a broad effort to forestall a global depression. Shareholders in those companies later filed suit, alleging that the federal government in so doing—and in subsequent actions while in control of the firms—took their property without compensation in violation of the Fifth Amendment. To date, those claims have not succeeded. If these cases continue on their current trajectory, with courts rejecting arguments that the rescue of systematically important firms on the brink of collapse requires compensation for shareholders, that outcome will have a profound consequence.

Any investor contemplating investment in such companies must now, in the calculus of the Takings Clause, understand the change in the reasonableness of their investment-backed expectations, and, potentially even more broadly, the “background principles” of property law that define such ownership, may now reflect those outcomes. In other words, the fact that federal bailouts in the recent crisis impaired (or even wiped out) shareholder value, and that those policy steps are surviving Fifth Amendment takings challenges, means we are resetting the baseline of expectation for shareholders. As a result, future regulators contemplating the need for swift intervention in the inevitable crises to come should worry far less about takings liability.