Loser-pays by consent in corporate governance?

by Walter Olson on May 15, 2014

“Delaware’s Supreme Court has ruled that corporations can adopt bylaws requiring an investor who sues and loses to pay the company’s legal costs, potentially upending the economics of a booming type of shareholder litigation.” [Tom Hals, Reuters via Federalist Society Blog]

{ 5 comments }

1 Boblipton 05.15.14 at 7:44 am

Can I do the same if I move to Delaware?

Bob

2 Boblipton 05.15.14 at 4:23 pm

On a more solemn level, this sort of change in corporate rules strikes me as morally, if not legally iffy. If I purchase shares and the corporate structure is later amended by limitations on the right to sue (as here) or changes in share structure (a la Google) or the more common habit of setting up poisoned pill rules that should an unsanctioned shareholder gain “too many” shares, various actions are taken — in all of these cases I lose some means of recourse save to throw up my hands and sell my shares. My rights as a minority shareholder are lessened. While the Delaware Court of Chancery — a wholly owned subsidiary of E.I. DuPont de Nemours — doubtless felt correctly that far too many lawsuits were being filed to hold Boards of Directors hostage, this strikes me as going too far in the other direction.

Bob

3 MattS 05.15.14 at 5:44 pm

Bob,

Wouldn’t a change to the corporate bylaws have to be passed by a shareholder vote? I don’t think that would be as legally iffy as you think, and certainly not as morally iffy.

4 Boblipton 05.15.14 at 6:40 pm

Yes, it would, Matt. However, let’s get real here. The Delaware Court of Chancery has consistently ruled against shareholder rights. This might have made sense when the board of directors consisted of the people who substantially owned the business. However, recent decisions like permitting the founders of Google, who foresaw that their continuing sales of shares would cause their position to drop below majority share, decided to convert those shares into a superior class; allowing Dell to delay reporting returns and reset voting on the privatization of the company; and their permitting companies to install poison pill provisions: these serve the managers and not the company nor its shareholders and simply serve to sever the connection between ownership and control.

I am in favor of loser pays. I simply find it appalling that its piecemeal installation, while sensible in terms of a lot of nuisance suits, can and will be used to insulate management from their responsibilities towards their employers.

5 DEM 05.16.14 at 4:21 pm

Bob, on a related note, you always have the option to vote with your feet, or to not buy in the first place. I for one will never buy a share of Google after the founders’ machinations. On the other hand, many companies have proven time and again to be quite shareholder-friendly. That’s where my money goes.

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