As most of my readers probably know, constitutional law is the high rent district in the law school pecking order. So when a con law professor stoops to discuss corporate law topics, attention must be paid.* Especially when he's right:
The fee shifting bylaw will strengthen the position of the corporation in negotiations with class action lawyers, who will now effectively face higher litigation costs if they lose. Consequently, fewer frivolous lawsuits may be filed. It is true that the rule may also deter some meritorious suits, but the rule can still be a good one if the net effect helps shareholders. The question is whether it is more likely that the corporation will choose a rule on litigation costs that will more likely benefit their own shareholders than the general American rule in litigation under which each side bears their own costs.
In my view, corporations are likely to make the better choice about whether a fee shifting rule should be adopted or not for their particular sets of lawsuits. Shareholders and corporations share common interests in deterring frivolous lawsuits. To be sure, corporate officials, unlike shareholders also want to avoid meritorious ones. But their ability to adopt a litigation rule that unduly favors their interests is limited by the power of shareholders. First, a majority of shareholders can amend the bylaw and eliminate fee shifting. (As Professor Stephen Bainbridge notes, there is uncertainty about whether a board of directors could then overturn shareholders’ amendment under Delaware law. I think here Delaware law should indeed be amended to permit shareholders to prevent such a back and forth). Second, shareholders can take account of the rule in their decision to buy or sell the stock, and institutional shareholders with large holdings can make this more than a theoretical possibility, bringing pressure to choose the better rule.
Kindly go read the whole thing.
* I kid, of course. Some of my best friends are con law profs.
