Big business is lobbying Delaware lawmakers for corporate bylaws to shift legal fees to shareholders who sue and lose, which legal experts say could curtail a booming type of investor class actions.
An affiliate of the U.S. Chamber of Commerce urged the Delaware General Assembly on Monday to defeat a bill in the state’s legislature that would block “loser pays” corporate bylaws.
The bill was drafted in response to a Delaware Supreme Court ruling on May 8 in a case involving ATP Tour Inc., which oversees men’s professional tennis. The court ruling held that such bylaws were valid and could be adopted to discourage litigation.
“The Delaware Supreme Court’s ATP decision gives corporations a way to protect their shareholders against these costs of abusive litigation,” said Lisa Rickard, president of the Institute for Legal Reform, in a letter to lawmakers. “Why would the Legislature so quickly deprive shareholders of the opportunity to obtain that protection?”
In U.S. litigation, both parties usually pay their own legal costs.
The bill was drafted with the backing of the Delaware bar association, which represents attorneys. The state’s courts handle the bulk of the class actions that have riled businesses.
Bryan Townsend, a Democratic state senator who sponsored the bill, told Reuters it had been pulled from Tuesday’s Senate agenda to consider comment from businesses.
Most legislation backed by the bar is adopted and Townsend said he expected his bill would become law.
A spokeswoman for Governor Jack Markell said he supported the bill.
The state has to weigh the interests of shareholders and its legal industry with a business-friendly reputation. Most U.S. companies with publicly traded stock are chartered in Delaware, and the related revenue accounts for up to 40 percent of its general budget.
Delaware corporations have access to the state’s courts and Delaware’s corporate law govern relations with shareholders through a company’s corporate bylaws.
Few, if any, companies have adopted loser-pays bylaws. Townsend said it was inaccurate for the Chamber of Commerce to call the bill anti-business since it merely reflected current practice.
Still, out-of-state law firms have been firing off client memos to build awareness of the little-noticed ATP case.
ATP, which incorporated in Delaware, had been trying to collect $17.7 million in legal fees from members who unsuccessfully sued its directors over the tour schedule. The federal judge overseeing the case asked the Delaware Supreme Court to weigh in on the validity of ATP’s fee-shifting bylaw.
While ATP is a non-stock organization, legal experts said the ruling would likely apply to stock corporations.
Business groups welcomed the ATP ruling as a way to rein in investor class action lawsuits in state courts.
Virtually every merger deal is challenged with a lawsuit accusing directors of agreeing to sell their company too cheaply. Nearly all of them settle for nothing but added information on the deal, and fees for plaintiffs’ attorneys.
The Institute for Legal Reform has called the lawsuits “extortion through litigation.”
(Reporting by Tom Hals in Wilmington, Delaware; Editing by Tom Brown and Dan Grebler)