Academic journal article Boston College Law Review

Correcting Corporate Benefit: How to Fix Shareholder Litigation by Shifting the Doctrine on Fees

Academic journal article Boston College Law Review

Correcting Corporate Benefit: How to Fix Shareholder Litigation by Shifting the Doctrine on Fees

Article excerpt

INTRODUCTION

Delaware may at last be on the verge of fixing shareholder litigation. Spurred by the surprise 2014 decision of the Delaware Supreme Court in ATP Tour, Inc. v. Deutscher Tennis Bund,1 the de facto national corporate law-maker has launched a thorough examination into fee-shifting in intra-corporate litigation.2 The current controversy over fee-shifting is an outgrowth of a larger crisis in shareholder litigation. And, just as matters of substance and procedure are inextricably interlinked, any examination into fee-shifting must also probe these deeper concerns. Delaware's inquiry into fee-shifting thus presents a unique opportunity to reevaluate the current system of shareholder litigation and to launch appropriate reforms.

The defects of shareholder litigation have long been known.3 Basically, the problem is one of too much and not enough: too much in the way of filings, and not enough consideration at settlement.4 In terms of filings, virtually every merger transaction is challenged, and derivative suits attend every corporate crisis, frequently following in the wake of prosecutorial or regulatory interventions.5 The vast majority of these claims settle, an outcome that is not unusual for civil litigation. What is striking, however, is the predominance of nonpecuniary relief. The vast majority of shareholder litigation settles for no monetary recovery to the shareholder class.6 Why? Because non-pecuniary relief nevertheless entitles plaintiffs' counsel to recover their fees from the corporate defendant under the "corporate benefit" doctrine.7 The application of this doctrine has led to the result that in shareholder litigation, the corporate defendant always pays fees and expenses for both sides. Defense counsel, for their part, have reconciled themselves to this result by bargaining, in exchange, for a broad release of claims at settlement, immunizing their clients from any and all claims related to the underlying facts, including theories and claims never asserted by the plaintiffs.8 Having struck this Faustian bargain, attorneys now churn a mass of filings and settlements, the ultimate result of which is overcompensation of attorneys (on both sides) and systematic under-compensation of the plaintiff class.

The opportunity to do something about this situation arose suddenly, in late spring 2014, in a surprise decision of the Delaware Supreme Court. In ATP Tour, Inc. v. Deutscher Tennis Bund, the Delaware Supreme Court held as a matter of law that Delaware corporations can adopt bylaws to shift attorneys' fees and litigation costs to unsuccessful plaintiffs in intra-corporate litigation.9 Delaware corporations, in other words, can use bylaw amendments to enact the English ("loser pays") Rule for shareholder suits.10

Because most shareholder plaintiffs sue in a representative capacity, feeshifting would have an especially pronounced effect on shareholder suits. Current fee-shifting proposals would force the representative litigant, suing on behalf of the corporation or the class, individually to bear the corporation's full cost of defending the suit.11 The individual litigant's upside, meanwhile, would remain limited to a proportional share of the recovery. By imposing the full downside risk on a litigant whose upside must be shared proportionally with the class, fee-shifting makes the bringing of representative shareholder actions economically irrational, even in cases involving potentially significant recoveries.12

The bar, understanding the threat posed by fee-shifting to shareholder litigation, reacted immediately.13 In the space of two weeks, the Delaware Bar Association proposed an amendment to the Delaware General Corporation Law to restore the status quo ante.14 The amendment proposed a per se ban on fee-shifting, barring corporations, whether by bylaw or charter, from imposing liabilities on shareholders.15 The proposed amendment was formally introduced into the Delaware State Senate on June 3, 2014, with every expectation that it would pass by the end of the legislative session and be effective as of August 1, 2014. …

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