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 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.
DRAFTED BY THE BAR
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.
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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.
EARLY STAGE
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)
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