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12 | Monday, august 11, 2014 | Commercial Litigation
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Bylaws
a threat or as part of a plan to force an unat- But in many other cases (such as federal Lawsuits: where is the line between legitimate and
frivolous?,” Stanford Closer Look Series, 2 (November
tractive deal on shareholders. For example, if erISA claims, where a prevailing plaintiff or 2012), http://www.gsb.stanford.edu/faculty-research/
the board were to adopt a fee-shifting bylaw defendant may be entitled to payment of its case-studies/shareholder-lawsuits-where-line-between- legitimate-frivolous (“Shareholder lawsuits against a
« Continued from page 9
that on its face would apply to then-pending attorneys’ fees, or state law claims for which company are an important mechanism in corporate gov-
vote would not be necessary to pass an litigation against the directors, the timing preemption is not an issue), the fee-shifting ernance. The threat of lawsuit provides strict incentive
enforceable fee-shifting bylaw amendment could suggest that the bylaw was adopted bylaw promises to deter frivolous lawsuits. to directors to fulfill their fiduciary duty.”).
(indeed, the statistical evidence cited above as a leverage or settlement tactic to advantage As long as corporations, their directors, and 5. See, e.g., Mukesh Bajaj et al., U.S. Chamber Insti- tute for Legal reform, “economic Consequences: The
strongly supports an argument that such the board, which would expose the bylaw counsel are prudent in their timing and pro- real Costs of U.S. Securities Class Action Litigation,”
an amendment is in both the corporation’s to challenge.
cess for enacting such a bylaw amendment, 29 (February 2014), http://www.instituteforlegalreform.
and the shareholders’ best interests), but they now should have one more way to pro- com/uploads/sites/1/economicConsequences_web.
pdf (analyzing over 1,400 settlements from 1996 to 2014
a shareholder vote would be powerful evi- Potential Limits of ‘ATP’
mote overall shareholder welfare.
and finding that shareholders “have actually suffered an incremental wealth loss due to the filing of [securities
dence that the board acted in good faith.
•class action lawsuits on their behalf] that is over $262
Second, before taking action, the board even where a corporation validly adopts ••••••••••••••••••••••••••••
billion”); Davidoff, supra note 2 at 4, 47 (analyzing 453
should inform itself of the costs and benefits a fee-shifting bylaw, such a bylaw may not 1. See S.J. res. 12, 147th Gen. Assemb. (Del. 2014), mergers involving publicly-traded target companies an-
to both the corporation and the shareholders apply to all cases shareholders bring against http://www.legis.delaware.gov/LIS/lis147.nsf/vwLegis- nounced from 2005 and completed through 2012 along with proxy-voting statistics, and finding that “disclosure-
of adopting such a bylaw. See Smith v. Van the corporation or its directors and officers. lation/SJr+12/$file/legis.html; Karlee weinmann, Del. only settlements produce costs but no benefits [to
Gorkom, 488 A.2d 858, 873 (Del. 1985). This For example, if the district court in ATP Lawmakers Delay Vote on Fee-Shifting Ban Amid Flak, LAw360 (June 10, 2014), http://www.law360.com/ar- shareholders]”).
could include reviewing empirical studies hews to its original holding that federal ticles/546354.
6. Olga Koumrian, Cornerstone, “Shareholder Liti-
demonstrating that certain types of share- antitrust law preempts a fee-shifting bylaw, 2. Steven M. Davidoff et al., Confronting the Pep- gation Involving Mergers and Acquisitions,” 1 (2014),
percorn Settlement in Merger Litigation, 2 (Feb. 2014), http://www.cornerstone.com/getattachment/73882c85- ea7b-4b3c-a75f-40830eab34b6/Shareholder-Litigation-
holder suits have more costs than benefits there may be other kinds of claims that http://scholarship.law.upenn.edu/faculty_scholar- ship/775/ (explaining that “deal litigation” often ends Involving-Mergers-and-Acqui.aspx.
for shareholders, or hiring an independent would likewise not be subject to fee-shifting. in settlements where “the only relief provided to share- 7. Olga Koumrian, Cornerstone, “Settlements of
consultant to conduct a cost-benefit analysis. The same reasoning could be extended to holders consists of supplemental disclosures in the Shareholder Litigation Involving Mergers and Ac-
Having a written record of the information the cases under the PSLrA, in which prevailing merger proxy statement” and that “[i]n compensation quisitions,” 1 (2014), http://www.cornerstone.com/ getattachment/7bd80347-124b-4b69-add5-575e33c3f61b/
board considers would document that the or settling class plaintiffs (but not defen- for the benefit produced by these settlements—often Settlements-of-Shareholder-Litigation-Involving-Me.
board carefully considered the amendment dants) are entitled to reasonable attorneys’ worth no more ... than a ‘peppercorn’—plaintiffs’ attor- neys receive a fee award.”).
aspx.
and concluded that fee-shifting was in the fees. See 15 U.S.C. 78u-4(a)(6). Thus, a court 3. John Mark Zeberkiewicz & Blake rohrbacher, “New 8. Davidoff, supra note 2 at 19, 20.
shareholders’ best interests.
could hold that shifting fees to plaintiffs is Day for Nonstock Corporations: The 2010 Amendments 9. Id.
to Delaware’s General Corporation Law,” 66 Bus. Law. 10. Ben w. Heineman Jr. and Stephen Davis, “Are Insti-
tutional Investors Part of the Problem or Part of the So-
Third, it is important that the board be impermissible in federal securities cases, 271, 274, 279 (2011), available at http://www.rlf.com/ lution?,” 9 (October 2011), http://www.ced.org/reports/
able to demonstrate that it adopted such a particularly given the expense of prosecut- files/TBL%2066-2_01rohrbacher.pdf.
4. David F. Larcker and Brian Tayan, “Shareholder
single/are-institutional-investors-part-of-the-problem-or-
bylaw on a “clear day,” i.e., not in response to
ing such claims.
part-of-the-solution.

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