The article is here. BNA gets all snippy if I quote from their articles, so I'll simply quote from the email I sent their reporter and from which he borrowed. The reporter's questions are indented and in blue. My answers are not indebted and in the ordinary font.
Do fee-shifting bylaws and charter have the effect of immunizing corporations and directors from shareholder suits?
In the first place, fee-shifting bylaws and charter amendments (FSBC) likely would only effect state law claims, so shareholder suits under federal securities law likely would be unaffected. Second, FSBC are not intended to prevent meritorious litigation. They are intended to deter meritless litigation that serves only to enrich plaintiff lawyers.
The prevalence of such lawsuits is indisputable, as is their deleterious effect on the US economy. As Lisa Rickard recently noted, “where shareholder litigation is reaching epidemic levels. Nowhere is this truer than in mergers and acquisitions. According to research conducted by the U.S. Chamber Institute for Legal Reform, lawsuits were filed in more than 90% of all corporate mergers and acquisitions valued at $100 million since 2010.” There simply is no possibility that fraud or breaches of fiduciary duty are present in 90% of M&A deals.
Between 1997 and 2005 there was a steady increase in both the number of shareholder suits and the average settlement value of those suits. The total amount paid in securities class actions alone peaked in 2006 at over $10 billion, even excluding the massive $7 billion Enron settlement. The vast majority of such settlement payments historically have been made either by issuers or their insurers, rather than by individual defendants. As a result, the vast bulk of settlement payments come out of the corporate treasury, either directly or indirectly in the form of higher insurance premia. In either case, settlement payments reduce the value of the residual claim on the corporation's assets and earnings. In effect, the company’s current shareholders pay the settlement, not the directors or officers who actually committed the alleged wrongdoing.
The effect of shareholder litigation thus is a wealth transfer from the company’s current shareholders to those who held the shares at the time of the alleged wrongdoing. In the case of a diversified investor, such transfers are likely to be a net wash, as the investor is unlikely to be systematically on one side of the transfer rather than the other. Because there are substantial transaction costs associated with such transfers, moreover, the diversified investor is likely to experience an overall loss of wealth as a result of shareholder litigation. Legal fees to plaintiff counsel typically take 25-35% of any monetary class action settlement, for example, and the corporation’s defense costs are likely comparable in magnitude.
The evidence seems clear that “that the system is broken, that shareholder suits are being filed regardless of the merits, and that shareholder plaintiffs are imposing a dead weight on society and an unwarranted burden on corporate America and the courts.” Marc Wolinsky & Ben Schireson, Deal Litigation Run Amok, 47 Rev. Sec. & Comm. Reg. 1 (Jan. 8, 2014). The authors offer a number of solutions, including an endorsement of fee shifting bylaws.
What effect do you believe the Delaware State Bar’s recent proposal regarding fee-shifting will have? Could some of the other proposals (forum selection and appraisal arbitrage) prevent abusive litigation?
The Bar proposal is an incredibly pro-litigation bill. Free shifting is a powerful tool that could potentially deter a substantial number of meritless lawsuits. Fee-shifting bylaws, if widely adopted, would raise the risk associated with filing these lawsuits and could weed out the weakest ones, said Sean Griffith, a professor at Fordham University's law school. “This could be a gut check for plaintiffs' lawyers,” Mr. Griffith said. “They would have to ask—for the first time, really—how good is my case?” Liz Hoffman, Shareholder Suits May Prove Costly, Wall St. J., May 18, 2014.
Meanwhile, the bill merely slaps a band-aid on the plague of appraisal arbitrage litigation. If the Bar had been serious about dealing with the rash of appraisal lawsuits, they would have proposed banning appraisal claims by anyone who bought shares after public announcement of the transaction.
Note that I did not say this was a pro-plainitff bill. It is a pro-lawyer bill. After all, fewer lawsuits mean less work for defense litigators too. Both sides of the litigation bar thus have a strong interest in banning fee shifting bylaws. Widespread adoption of fee shifting bylaws could also adversely affect transactional lawyers. Litigation risk is a major driver in the level of advisory work. All corporate lawyers—litigators and transactional—have a strong incentive to oppose fee shifting bylaws.
And that's why this bill will do nothing--nada, zip, zilch--to deter frivolous litigation.
