Sunday, April 19, 2015

Shareholder Litigation "War" in Delaware

As asked recently in DealB%k of the New York Times: "Delaware is going to war over shareholder litigation, but will shareholders or corporations emerge victorious?" There may soon be changes in the landscape of corporate law in the United States. Delaware, home to many U.S. corporations, is considering three amendments to its laws that will reduce and deter shareholder litigation. The first purportedly tramples the rights of shareholders of an acquired company to argue in court that the takeover price was too low. This proposal would limit small shareholder claims by banning all appraisal rights of shareholders, “if the aggregate amount of claims asserted were less than 1 percent of the outstanding shares or $1 million in total.”

The second proposed change would allow Delaware companies to amend their bylaws, without shareholder permission, to require that all claims brought against it be litigated in Delaware.  This may hamstring plaintiffs in their efforts to hold corporations accountable for injuries that occur throughout the nation.  The third and most questionable change “would ban fee-shifting bylaws, which require the loser in fiduciary duty litigation to pay the fees and expenses ofboth sides.”  This proposed amendment to current law could bring shareholder class-action to a stalemate, because plaintiff’s attorneys will be deterred from filing meritorious cases, based on a fear that they would be stuck with millions of dollars in legal fees if they lose.

Again, according to Dealb%k commenting on the proposed fee-shifting rule: "It’s all a bit curious because losers already pay in the United States if their suits are frivolous. Because courts can already award attorneys’ fees, fee-shifting bylaws run the risk of deterring valid claims.  While the Delaware Legislature and the corporate bar are dealing with these issues as three different problems, they are, in fact, related. Each is aimed at altering the ability of shareholders to bring suit. Perhaps a better approach would be a thoughtful discourse on how all of these proposals work or don’t work together and whether they would curtail shareholders’ rights too much."

For many Delaware corporations these proposed changes may be appealing, but for shareholders the potential outcomes of these changes could derail efforts to vindicate the limited rights that they currently possess.

** This post was co-drafted by 2L Shawn Good of the Indiana Tech Law School and Dean andré douglas pond cummings


  1. Anna Magnuson, Bus Org 2015April 23, 2015 at 11:34 AM

    The proposed ban on fee-shifting bylaws does seem like overkill. Perhaps, there are enough debatably frivolous lawsuits being filed that this proposal is being considered because the plaintiff's attorneys are not being deterred by the potential ramifications presently in place resulting in abuse of the court systems and plaintiffs who have to pay the attorney's fees for frivolous suits that are filed on the hope and chance that something will stick and yield a win.
    Limited rights of shareholders in publicly held corporations are just that: limited. And they knew that making the investment to get a sliver of a share of a corporation that they cannot control.
    But undoubtedly, these reaching suggested amendments are backed by the corporations being tired of the mosquitoes buzzing around them.

  2. All 3 methods of attempting to minimize shareholder litigation in Delaware are aimed at costs. The fastest was to change an action is to raise the costs associated with that action. For many shareholders who do not have access to large sums of ready cash, something such as this will certainly be the deterrent to minimize any such litigation. If the shareholder raises claims of the price being too low there is, or was, an adverse financial ramification. Mandating that litigation be in Delaware also creates financial limitations for those who may not readily have the finances, and the time, to do so. Making the losing shareholder(s) pay litigation costs of their side and the opposing side creates an even greater advantage to the entity with the deeper pockets - the corporation.
    Everything a shareholder attempts to gain through legal processes with regard to such litigation will be a highly expensive encounter in the event of a loss. This is very much akin to gambling or betting on sports. It's great so long as you win. But lose and buy dinner for the winner!