My article, Fee Shifting: Delaware's Self-Inflicted Wound (June 29, 2015), available at SSRN: http://ssrn.com/abstract=2624750, argues that:
In a 2014 opinion (ATP Tour, Inc. v. Deutscher Tennis Bund), the Delaware Supreme Court upheld a fee-shifting bylaw, which required unsuccessful shareholder litigants in either derivative or direct actions to reimburse the corporation for its legal expenses. Although the entity in question was a non-profit, non-stock corporation, most observers expected the Delaware courts to extend that holding to for-profit stock corporations. In the months that followed, about 50 Delaware corporations adopted such bylaws.
In its 2015 legislative session, however, the Delaware legislature adopted amendments to the Delaware General Corporation Law (S.B. 75) that effectively bans such bylaws. This article argues that this ban is contrary to sound public policy and adverse to Delaware’s own interests. It then advances an interest group analysis, focusing on the power of the Delaware bar, to explain why the Delaware legislature would have inflicted such a serious wound on itself.
This analysis leads to two take-home lessons. First, if it wishes to ensure that future legislation advances both sound public policy and the state’s financial interests, the Delaware legislature needs to free itself from the bar’s influence. In addition, the business community needs to invest lobbying resources in Delaware so as to counter the bar’s influence in cases such as this. Second, states in which the corporate bar wields less legislative influence thus may have a significantly easier time adopting legislation authorizing such bylaws. If so, the likelihood that S.B. 75 will significantly reduce Delaware’s dominance of corporate law will go up substantially.
The article is now even more timely, as today's WSJ reports that:
Dole and Other Companies Sour on Delaware as Corporate Haven
Most popular state for corporate registrations has challengers who say it doesn’t offer enough protections against shareholder lawsuits
Which is precisely what my article predicts. The Journal's report continues:
Dole Food Co. has its pick of ports along the East Coast to drop off its bananas and pineapples from Costa Rica and Honduras. But since the 1980s, Wilmington, Del., has been a regular unloading point. In 2001, Dole went a step further, moving its legal home to Delaware from Hawaii.
Like thousands of U.S. companies, Dole was attracted by the state’s business-friendly reputation: Managers enjoy broad latitude in day-to-day operations, from corporate spending to buyouts. Firms are shielded by tough antitakeover laws. And special business courts, widely considered the most sophisticated in the nation, have over the decades blessed new corporate defenses and set clear rules for the rough-and-tumble merger world. ...
Dole is facing potentially costly litigation from shareholders who sued the fruit giant after it was sold to its chief executive, David Murdock in 2013. The lawsuits, filed in Delaware’s Chancery Court, argue that the company was sold too cheaply and seek damages that could stretch into the hundreds of millions of dollars.
Dole is one of several companies that say the state has become less hospitable toward business. Among their gripes: a growing tide of shareholder litigation, which some feel the state hasn’t done enough to curb. One new measure bars companies from shifting their legal fees to shareholders who sue and lose—a boon to would-be plaintiffs.
That provision, of course, is the subject of my article. The Journal goes on to report:
Other states are angling for Delaware’s business. Michigan and Texas have moved to establish separate business courts with judges steeped in corporate-law expertise.
Nevada, corporate home to companies including Dish Network Corp. and retailer AutoZone Inc., touts its lower corporate taxes. Oklahoma, meanwhile, last year passed a law meant to protect boards from some shareholders lawsuits—including the sort now flourishing in Delaware. The law requires plaintiffs in these cases to pay both sides’ legal costs if they lose—the same hitch that the new Delaware law bans.
Which is also what I predicted.