March 19, 2019 / 6:18 PM / 4 months ago

Nevada lawmakers to consider fee shifting in shareholder litigation

(Reuters) - In a clear effort to differentiate Nevada from Delaware as a haven for incorporation, state senator Yvanna Cancela introduced a bill Monday that would allow companies incorporated in Nevada to force shareholders to bear defense costs in unsuccessful litigation over M&A transactions, as long as the deals have been approved by a shareholder majority. The bill would also authorize state officials to issue rules encouraging plaintiffs’ lawyers to indemnify shareholders against exposure to defense fees.

There’s no certainty, said law professor Benjamin Edwards of the University of Nevada at Las Vegas, that the Nevada legislature will pass the bill, but it’s worth noting that Cancela, a Democrat, is the co-majority whip of the state senate.

Edwards, who wrote about the new bill in a blog post, said the Nevada proposal is a response to the Delaware legislature’s 2015 law prohibiting fee-shifting in shareholder litigation against corporations. (The Delaware law, you’ll recall, was prompted by a 2014 Delaware Supreme Court ruling in ATP Tour v. Deutscher Tennis Bund, 91 A.3d 554, that appeared to endorse the legitimacy of a fee-shifting provision in a private corporation’s charter.) Nevada is second only to Delaware in enticing out-of-state businesses to incorporate within its borders – but it’s a very distant second, Edwards said. This bill might encourage businesses intrigued by fee shifting to incorporate or reincorporate to pick Nevada instead of Delaware.

Edwards told me that he shared a preliminary version of his upcoming Tennessee Journal of Business Law paper, “Crafting Fee-Shifting Policy,” with Nevada’s legislative counsel as Senator Cancela’s bill was being drafted. The paper argues that the market reaction to a fee-shifting law could provide important insights about the value of shareholder litigation. If, for instance, a public company’s share price dropped after an announcement of the adoption of a fee-shifting provision, Edwards said, we could infer that the market believes shareholder litigation benefits corporations – and thus that Delaware was right to bar fee shifting.

Conversely, if a fee-shifting provision pushes a company’s share price up, it’s fair to assume that shareholders believe they’re better off eschewing litigation against the company. “This result,” Edwards wrote, “might accelerate any shift in market share toward a state endorsing fee-shifting provisions because it would make a corporation more valuable.”

That sort of market reaction, Edwards said, could be an opening for Nevada since Delaware is already in the anti-fee-shifting camp. (In fact, according to Edwards’ paper, at least seven Nevada-incorporated companies have already adopted fee-shifting provisions.) “The bill, for Nevada, makes a lot of sense,” he said, noting that Nevada’s strategy for attracting out-of-state incorporations has been to reduce business’ exposure to shareholder liability.

If the fee-shifting law proves ineffective, there’s a trapdoor in Senator Cancela’s proposal, which calls for the Nevada secretary of State to report back to the legislature on the impact of the law over its first three years.

After Delaware barred fee shifting, Oklahoma passed a law that automatically shifts fees when shareholders bring unsuccessful claims against a corporation. The Nevada proposal falls between those extremes, allowing companies to require fee shifting but not mandating it. The bill, Edwards said, does not specify whether corporations may adopt fee-shifting provisions by charter, bylaw or some other means.

In Delaware, the shareholder bar mobilized quickly after the Supreme Court’s ATP ruling to lobby state lawmakers against fee shifting. Edwards said there’s not a similarly organized and powerful shareholder bar in Nevada. I did reach out to the state’s trial lawyer organization, the Nevada Justice Association, but a spokeswoman said the group hasn’t yet had a chance to review the newly introduced proposal. Senator Cancela’s office didn’t respond to an email requesting comment.

The views expressed in this article are not those of Reuters News.

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