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Lawyers Descend On Delaware To Kill Shareholder 'Tax' Relief

June 18, 2014

By James R. Copland

In a May 8 decision, the Delaware Supreme Court permitted a corporation to include in its bylaws a "loser pays" provision for shareholder litigation that would require a shareholder suing the corporation to reimburse the company its legal fees if the shareholder is unsuccessful in the lawsuit.

In less than a month, lawyers flexed their legislative muscle. On June 3, Democratic lawmakers allied to the trial bar introduced a proposed law, Delaware Senate Bill 236, that would reverse the court's decision.

A quick outcry from the business community has the legislation held in abeyance for now. But the lawyers' pressure on legislators is intense, and the stakes are high.

Delaware serves as the default "corporate law" regime for the nation:

A majority of all publicly traded companies, and more than 60% of those in the Fortune 500, are incorporated in the state. Delaware's specialized business courts, which date to 1792, have given confidence to managers and shareholders alike.

About 20% of Delaware's state revenues derive from corporate franchise fees, so why would legislators be so quick to risk the state's status by second-guessing the state's highest court on a corporate-law question?

The answer lies in the simple fact that the trial bar dominates the Delaware legislature, financially and otherwise. And shareholder-shakedown suits have become big business for the bar. Among corporate mergers valued at over $100 million, 94% faced a shareholder lawsuit challenging the deal in 2013, up from 44% in 2007.

While lawyers for both plaintiffs and defense profit handsomely from these suits, shareholders are left holding the bag. Shareholder lawsuits essentially pit shareholders against themselves, since the money paid to defend against and settle such litigation comes from corporate coffers.

There is an important place for shareholder litigation to prevent boards and managers from enriching themselves at shareholders' expense. But when almost all corporate mergers trigger lawsuits, the lawsuits are clearly not distinguishing between deals that are good and those that are bad.

Instead, such litigation is little more than a "lawyer tax" extracting from shareholders a fee alongside those for investment bankers and deal attorneys that goes to the trial lawyers' pockets.

Enter the corporate bylaw in question in the Delaware Supreme Court's recent ATP Tour decision.

One reason why the rest of the developed world has significantly less litigation than the U.S. is that in virtually every other advanced nation, the losing side in lawsuits pays the winner's fees, which naturally deters lawyers from filing weak lawsuits to shake down corporate defendants.

In a May 8 decision, the Delaware Supreme Court permitted a corporation to include in its bylaws a "loser pays" provision for shareholder litigation that would require a shareholder suing the corporation to reimburse the company its legal fees if the shareholder is unsuccessful in the lawsuit.

In less than a month, lawyers flexed their legislative muscle. On June 3, Democratic lawmakers allied to the trial bar introduced a proposed law, Delaware Senate Bill 236, that would reverse the court's decision.

A quick outcry from the business community has the legislation held in abeyance for now. But the lawyers' pressure on legislators is intense, and the stakes are high.

Delaware serves as the default "corporate law" regime for the nation:

A majority of all publicly traded companies, and more than 60% of those in the Fortune 500, are incorporated in the state. Delaware's specialized business courts, which date to 1792, have given confidence to managers and shareholders alike.

About 20% of Delaware's state revenues derive from corporate franchise fees, so why would legislators be so quick to risk the state's status by second-guessing the state's highest court on a corporate-law question?

The answer lies in the simple fact that the trial bar dominates the Delaware legislature, financially and otherwise. And shareholder-shakedown suits have become big business for the bar. Among corporate mergers valued at over $100 million, 94% faced a shareholder lawsuit challenging the deal in 2013, up from 44% in 2007.

While lawyers for both plaintiffs and defense profit handsomely from these suits, shareholders are left holding the bag. Shareholder lawsuits essentially pit shareholders against themselves, since the money paid to defend against and settle such litigation comes from corporate coffers.

There is an important place for shareholder litigation to prevent boards and managers from enriching themselves at shareholders' expense. But when almost all corporate mergers trigger lawsuits, the lawsuits are clearly not distinguishing between deals that are good and those that are bad.

Instead, such litigation is little more than a "lawyer tax" extracting from shareholders a fee alongside those for investment bankers and deal attorneys that goes to the trial lawyers' pockets.

Enter the corporate bylaw in question in the Delaware Supreme Court's recent ATP Tour decision.

One reason why the rest of the developed world has significantly less litigation than the U.S. is that in virtually every other advanced nation, the losing side in lawsuits pays the winner's fees, which naturally deters lawyers from filing weak lawsuits to shake down corporate defendants.

Original Source: http://news.investors.com/ibd-editorials-perspective/061714-705049-shareholder-shakedown-suits-leave-shareholders-with-the-bill.htm

 

 
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