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Delaware bar association law council recommends fee-shifting limits

A 2014 Delaware Supreme Court decision allowing corporations to shift legal fees to investors bringing lawsuits could be largely undone, following recommendations made from Delaware state bar experts.

State legislators asked the Delaware State Bar Association’s Corporation Law Council to weigh in on whether corporations should be able to adopt fee-shifting bylaws. Calling them “problematic” for publicly owned corporations, council members on March 6 called for legislation allowing it only for private companies. “Fee shifting effectively eliminates stockholder rights, because stockholder litigation is the only method of enforcing them,” the recommendations said.

Council members said their recommendations were needed “to maintain a balanced statute,” but business groups hoping to address what they consider an epidemic of shareholder litigation — particularly involving mergers and acquisitions — were disappointed. It “is a huge win for Delaware’s lawsuit business at the expense of shareholders in Delaware companies,” said Lisa Rickard, president of the U.S. Chamber Institute for Legal Reform.

The bar council also recommends banning the selection of courts in other states for stockholder litigation cases against Delaware companies, and eliminating nuisance appraisal lawsuits after corporate mergers.

The proposal benefits investors and the state, said Jeff Mahoney, general counsel of the Council of Institutional Investors. “Barring fee-shifting provisions strengthens the accountability of Delaware companies to their shareholders. It also safeguards Delaware’s pre-eminence as the adjudicator of U.S. business disputes.”

If the bar association’s executive committee approves the recommendations, they will be sent to the Legislature.