New Tools to Manage the Problem of Nuisance Shareholder Litigation: Delaware Emphatically Upholds Forum Selection Bylaws with Reasoning that May Support Bylaws for Reimbursement of Attorney’s Fees

Plaintiffs’ counsel instigated shareholder litigation against corporate defendants has markedly increased in recent years. For example, the plaintiff’s bar now files suit in almost every large merger transaction. In 2011, 96% of all mergers and acquisitions valued at over $500 million were subject to litigation, representing an increase of 43 percentage points over the proportion of transactions garnering litigation in 2007. These suits are profitable for the plaintiff’s firms sponsoring the litigation. The New York Times reported that corporations agreed to pay plaintiff’s legal fees of about $1.2 million on average for suits filed in 2010 and 2011. But the benefit to shareholders nominally behind these suits is less clear. Five percent of these settlements produced more cash for shareholders, while more than 80% of the suits required only additional disclosures. Of the 162 transactions in which litigation was settled on a disclosure only basis, only two were later voted down by stockholders. One leading securities professor noted: “Unless one believes that ‘disclosure only’ settlements truly benefit shareholders and justify million dollar fee awards (in which case this author would like to sell you a bridge to Brooklyn at a very cheap price), then such litigation gives off at least a faint odor of collusion . . . with shareholders ultimately bearing the costs of both sides” of the litigation.

More recently, these collusive lawsuits have found another attractive target: advisory say-on-pay votes on executive compensation which began in 2011 pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act. These suits seek to enjoin an upcoming shareholder vote and thereby pressure the company to settle the suit without regard to the merits of the complaint, provided that the price of the settlement is less than the cost that would be incurred by rescheduling the vote and litigating the challenge. Settlement payments in these suits to plaintiffs have ranged between $125,000 and $450,000 (and more).

Shareholder litigation is generally characterized by multiple suits filed by separate law firms, and suits filed in multiple jurisdictions. In 2011, mergers encountered an average of six lawsuits and, in 2011, 90% of merger litigation against Delaware corporations included suits filed outside Delaware. This trend has been explained based on the analytics of plaintiff’s counsel that Delaware courts are generally less favorable to plaintiffs in awarding fees and non-Delaware jurisdictions generate increased delay and uncertainty. This delay and uncertainty can be used to gain leverage in settlement negotiations and apportionment of settlement proceeds among competing law firms.

Forum selection provisions in a corporation’s charter or bylaws are designed as a tool to reduce the likelihood of, or increase the defenses against, multi-jurisdiction litigation of intra-corporate disputes such as shareholder litigation against corporations and corporate directors and officers. A forum selection bylaw is a provision in a corporation’s bylaws that designates a forum, typically Delaware for a Delaware corporation, as the exclusive venue for certain stockholder suits against the corporation, its directors and officers.

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