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Trials & Litigation

New bill could nix top Delaware court’s OK of loser-pays rule for attorney fees in corporate cases

Posted Jun 10, 2014 12:45 PM CDT
By Martha Neil

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With unusual speed, a bill was drafted by Delaware lawyers and introduced in the state legislature that could negate a state supreme court ruling last month approving a corporate fee-shifting bylaw affecting shareholder litigation.

The bylaw required losing plaintiffs to cover the company's attorney fees and costs for corporate litigation in which the company prevails, potentially decimating shareholder derivative litigation if other corporations adopt similar bylaws.

But the measure drafted by the corporate section of the Delaware State Bar Association, which may be considered Tuesday by the state senate, would amend the state's general corporation law to prohibit publicly held companies from shifting their legal expenses onto shareholders, according to the News Journal. Private companies that don't issue stock would still be allowed to include such prohibitions in their bylaws.

Willis Wire, which provides a copy of the bill (PDF), says it would also allow corporate bylaws shifting legal expenses to shareholders if shareholders expressly approve such rules.

The bill is backed by Democratic lawmakers and the state's governor. Proponents say it would protect a respected system of court decision-making on corporate matters that is a model throughout the country and makes Delaware a top choice when companies decide where to incorporate. State taxes and fees from Delaware-based corporations amount to $1 billion annually, the newspaper reports.

Otherwise, if plaintiffs risk paying a huge legal fee for the company, "nobody would bring shareholder litigation anymore, certainly not in Delaware," says attorney Stuart Grant. He represents shareholders in such litigation and is a major campaign fundraiser for the governor.

Opponents, including the U.S. Chamber of Commerce, say the proposal is moving too quickly for thoughtful review and argue that litigation over mergers and acquisitions often benefits plaintiffs lawyers more than the companies they represent, through shareholders, in derivative litigation.

All but a small fraction of corporate takeover deals are contested, with median attorney fees of nearly $500,000 in each case, the News Journal notes.

See also:

ABAJournal.com: "Delaware decision could spur fee-shifting bylaws, putting a damper on shareholder suits"

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