Of Babies and Bathwater: Deterring Frivolous Stockholder Litigation Without Closing the Courthouse Doors to Legitimate Claims
Bernstein Litowitz Berger & Grossmann LLP
Warren Buffett’s 2018 Activist Investment
Bernstein Litowitz Berger & Grossmann LLP
The Delaware Supreme Court’s May 8, 2014 Opinion in ATP Tour marked a sudden and potentially transformative moment in the relationship among corporate boards, their stockholders, and the Delaware legal system. This article observes that failure to legislatively override the ATP precedent is likely to eliminate all but the most unusual types of stockholder litigation. The authors juxtapose the evolution of the pertinent jurisprudence with the backdrop of an increase in the volume of deal-related stockholder litigation. Notably, on March 6, 2015, the Delaware Corporation Law Council proposed a recommended amendment to the DGCL to legislatively overrule ATP, to the extent it would apply to public companies. The Council’s proposal is generally consistent with the core conclusion of this article, which consolidates the legal and policy reasons for Delaware legislators and pertinent commentators to support the proposal.
The article asserts that the “nuclear option” of allowing boards of public companies to employ fee-shifting bylaws against stockholders whose interests they are supposed to represent is poor policy and departs from well-established legal principles. Moreover, such a draconian use of corporate power is not needed to curtail the problem of frivolous lawsuits that achieve no material benefit for stockholders while providing corporate defendants with broad releases. In opposing fee-shifting bylaws, the authors provide legal and policy reasons not to permit bylaws or charter provisions to be used to impede fundamental stockholder rights, including the right to enforce fiduciary duties through litigation. Furthermore, the authors propose an alternative to fee shifting to reduce the number of cases that provide no material benefit to stockholders and put a strain on corporations and the judiciary.
Of Babies and Bathwater: Deterring Frivolous Stockholder Litigation Without Closing the Courthouse Doors to Legitimate Claims – Introduction
“Private enforcement of [state corporation] law and … federal securities laws is imperfect. No one has written more law journal articles saying that there are imperfections with securities class actions than I. But there’s a strong argument with a very simple theme: You don’t throw the baby out with the bath[water]. We… are going to create chaos.”
Too much has been said and written about perceived problems in the world of deal-related stockholder litigation. True, it is troubling that a majority of public corporation mergers results in a lawsuit. While the volume of litigation grabs headlines, the real problem is the percentage of these stockholder lawsuits that achieve little, if anything, for stockholders while giving away overbroad liability releases for corporate defendants and paying both plaintiffs’ and defendants’ lawyers. We believe that reducing the incentives to bring the weakest lawsuits in the first place is beneficial, both for corporate actors looking to pursue a deal in good faith, for investors generally, and for the judiciary. However, those seeking to empower senior executives and directors without limit, such as the U.S. Chamber of Commerce, are using the sheer number of mergerrelated lawsuits to urge “solutions” that would immunize corporate executives and directors from accountability for all wrongdoing, regardless of how egregious their misconduct.4 We believe it is
critical that purported solutions not throw out the proverbial baby with the bathwater.
The rhetoric surrounding problems in the stockholder litigation field has become overblown. Recent court rulings and legislative acts have endorsed measures that seemed unthinkable less than a year ago.5 Before the Delaware Supreme Court decided ATP Tour, Inc. v. Deutscher Tennis Bund,6 no one publicly advocated the idea of allowing boards to unilaterally impose bylaws that immunize them from representative litigation to hold them accountable for self-dealing or other corporate misconduct. While the ATP Opinion itself expressly applies only to non-stock member corporations, the Opinion arguably has a broader reach. In the wake of ATP, over 50 public companies adopted fee-shifting bylaws.
This article examines the ATP ruling from legal and policy precedent perspectives. Finding that ATP is inconsistent with various well established common law and statutory protections for stockholders, we find that it is likely to eliminate all stockholder litigation, irrespective of merit. The inability of fee-shifting bylaws to differentiate between meritorious and frivolous suits while impairing fundamental stockholder rights is a fundamental flaw with the entire concept, whether or not ATP could somehow be read to conform to Delaware law. Accordingly, the authors support the March 6, 2015 proposal from the Delaware Corporation Law Council to legislatively prohibit the use of fee-shifting provisions in the public company context.7 Rather than simply criticize ATP and support the legislative proposal, we propose a carefully tailored answer to frivolous litigation, which mitigates abuses, conforms to longstanding legal principles, and preserves the benefits of board accountability and meritorious stockholder litigation.
See full PDF below.