I examine a novel corporate governance channel exercised by small investors: shareholder class actions, in which dispersed shareholders collectively sue their own firms, often for failing to disclose material information. Paradoxically, these lawsuits typically generate wealth transfers from innocent current shareholders to the plaintiff class, while shareholders who profited from the nondisclosure by selling before the bad news are largely unaffected. In an efficient stock market, class actions serve as an off-equilibrium governance device that motivates initial shareholders to encourage full managerial disclosure. When markets are inefficient, both equilibrium disclosure and the impact of compensation awards are non-monotonic. Intermediate bad news are disclosed to influence the lawyer’s litigation strategy, while both small and large shocks are concealed; moreover, awarding higher compensation in class actions does not necessarily improve disclosure incentives for initial shareholders. Finally, a greater presence of small, short-term shareholders increases the likelihood of litigation, reversing the traditional view that dispersed ownership weakens shareholder discipline.