(Reuters) - An influential group of lawyers in Delaware, home to more corporations than any other state, is gearing up to do battle with some of the largest U.S. companies over the increasingly busy industry of shareholder lawsuits.
The lawyers’ group, which includes attorneys for both plaintiffs and defendants, fired its opening salvo last week: A series of legislative proposals that, if enacted, would help ensure that Delaware remains the go-to venue for corporate disputes.
One proposal would prohibit companies from adopting bylaws or charter provisions requiring investors who sue and lose to pay the company’s legal fees. These “fee-shifting” or “loser-pays” clauses sweep away the so-called American Rule in U.S. litigation, which generally assumes that each party pays its own legal costs, regardless of the outcome. Delaware courts can award fees to punish abusive tactics.
Big business was quick to respond. In a statement, Lisa Rickard, president of the U.S. Chamber of Commerce’s Institute for Legal Reform, blasted the proposed ban on fee-shifting as “a huge win for Delaware’s lawsuit business.”
More than 30 companies, including Alibaba Group Holding Ltd and Interactive Brokers Group Inc, have adopted fee-shifting bylaws or charter provisions in the past year, after they were upheld by Delaware’s Supreme Court. Companies see them as a tool to shut down meritless shareholder lawsuits creating the risk that a shareholder could sue, lose and face an enormous legal bill.
Over the past decade there has been a sharp increase in shareholder class action lawsuits, which now are filed against nearly every merger deal and almost always in Delaware’s Court of Chancery, the primary U.S. forum for corporate disputes. Most of the cases settle quickly with investors winning little beyond payment of their attorneys’ fees and more information about the deal. The Chamber refers to these merger class actions as “extortion through litigation.”
Reuters last month detailed how the practice works in a report on the most frequent plaintiff in shareholder class actions to block mergers since 2011.
The proposed ban on fee-shifting was drafted by the Corporate Law Council, a committee of the Delaware bar. The Council includes well-known shareholder attorneys such as Stuart Grant of Grant & Eisenhofer as well as top partners from firms that defend companies, such as Skadden, Arps, Slate, Meagher & Flom.
Delaware’s leaders consider the state’s corporate laws, which protect directors who act in good faith, a key factor in enticing more than 1 million businesses and other entities to charter there, even though few have any operations in the state. Fees and other income associated with incorporation make up as much as 40 percent of Delaware’s general budget revenue, helping to keep down taxes.
Members of the Corporate Law Council declined to answer questions and referred Reuters to a paper circulated with the proposals. In it, the committee said allowing companies to continue adopting fee-shifting bylaws could prevent investors from suing company directors who shirk their duty to shareholders.
“The effects on stockholder litigation would be severe,” according to the paper. It noted that most shareholder lawsuits are brought by smaller investors or pension funds, and posited that few plaintiffs would be willing to take the risk of being on the hook for a company’s legal fees, which could run into the millions of dollars.
Fewer lawsuits would also reduce the role played by the Delaware Court of Chancery in developing the state’s corporate law with its regular rulings on Wall Street dealmaking strategies, according to the bar committee.
Fee-shifting first gained attention in May, when Delaware’s Supreme Court ruled that ATP Tour Inc, which governs men’s professional tennis, could enforce a loser-pays bylaw against two members who sued its board and lost.
The Delaware bar group’s package of anti-fee shifting and other proposals is still in the early stages. Before it can go to lawmakers it must be approved by a larger group of lawyers who specialize in corporate law.
There are signs of opposition within the Delaware bar.
In a note to clients, prominent Delaware attorney John Reed, who defends companies for DLA Piper, was critical of the proposals, which he said as a whole gave the “appearance of a litigation land grab” by shareholder attorneys.
Reed, who co-authored the memo with Ed Batts of DLA’s Silicon Valley office in California, was referring to the Corporate Law Council’s proposals related to another increasingly common corporate practice: adopting bylaws that direct shareholder lawsuits against the company to Delaware.
The bar committee approves of such “forum-selection” bylaws, asserting that they help curtail the abusive and costly practice of shareholders filing nearly identical class action lawsuits simultaneously in multiple courts.
The lawyers say they hope that officially endorsing such rules will encourage courts outside the state to dismiss cases that should have been filed in Delaware.
But while the committee supports forum-selection that directs legal business to Delaware, it opposes allowing bylaws that would require lawsuits to be filed in other states.
“The requirement that Delaware courts must be specified strikes me as creating the potential for other states to be unhappy with Delaware,” Claudia Allen, a corporate governance specialist at Katten Muchin Rosenman in Chicago told Reuters.
Reporting by Tom Hals in Wilmington, Delaware; Editing by Amy Stevens and Sue Horton