Limiting Frivolous Shareholder Lawsuits Via Fee-Shifting Bylaws: A Call for Delaware to Overturn and Revise Its Fee-Shifting Bylaw Statute

INTRODUCTIONMergers and acquisitions ("M&A") are a central part of the current economic marketplace.1 In recent years, however, these transactions have come under attack through an increasingly popular legal device: shareholder lawsuits.2 This growing trend has exploded in recent years, with 93% of all mer gers and acquisitions in 2013 being subject to at least one shareholder lawsuit.3 Although one would hope that a large majority of these lawsuits result in monetary benefits for the shareholders, this is unfortunately not the case.4 It has been estimated that shareholders lose $39 billion annually because of these lawsuits, compared to an average of $5 billion that investors receive as a result of lawsuit settlements.5 With an annual loss of $34 billion to shareholders, there is a need for legal reform in this area to curtail the abuse of frivolous shareholder lawsuits.6Unexpectedly, in May 2014, in ATP Tour Inc. v. Deutscher Tennis Bund, the Delaware Supreme Court provided a potential solution to this problem when the court affirmed a corporation's right to adopt fee-shifting bylaws.7 By affirming this right, a Delaware corporation could now adopt a corporate bylaw allowing it to shift all costs of litigation to any shareholder who brought an unsuccessful lawsuit against it.8 Just over a year later, however, the Delaware State Legislature ultimately decided to do away with this potential solution.9 In June 2015, the Governor of Delaware Jack Markell signed into law a prohibition against fee-shifting bylaws for stock corporations.10 With this new law in place, Delaware corporations once again have minimal protection against frivolous shareholder lawsuits.11This Note argues that Delaware should amend its fee-shifting prohibition and, barring that, Delaware courts should read the statute narrowly and not apply it to securities class action lawsuits.12 Part I of this Note discusses corporate governance structures and describes the use, and possible abuse, of shareholder derivative lawsuits and shareholder class action lawsuits as well as reform measures by the federal government and several states.13 Part II examines attempts at shareholder lawsuit reform in Delaware and then reviews the Delaware Supreme Court's approval of fee-shifting bylaws in ATP Tour.14 Part III focuses on the Delaware State Legislature's response to the ATP Tour decision, including the legislature's subsequent prohibition of fee-shifting bylaws for stock corporations.15 Finally, Part IV proposes two solutions that Delaware could take to limit the negative effects of shareholder lawsuits. 16 First, it proposes that the Delaware State Legislature should amend its corporate laws to allow corporations to adopt fee-shifting bylaws.17 Alternatively, recognizing that the Delaware State Legislature is unlikely to immediately reverse course, Part IV also proposes that Delaware courts should read the statute prohibiting fee-shifting bylaws narrowly so that it does not apply to securities class action lawsuits.18I. CORPORATE GOVERNANCE AND SHAREHOLDER LITIGATION: AN INCREASING TREND TOWARDS SHAREHOLDER CLASS ACTION LAWSUITS FOLLOWING MERGERS AND ACQUISITIONSThis Part provides an overview of the corporate governance structure, explores two legal devices-shareholder derivative lawsuits and class action lawsuits-that provide shareholders with the ability to police corporate governance decisions, and discusses legislative shareholder reform measures at both the federal and state level.19 Section A reviews the corporate governance structure and the formation of shareholder derivative and class action lawsuits.20 Section B discusses the characteristics and typical outcomes of shareholder derivative lawsuits.21 Section C describes the recent trend away from derivative lawsuits and towards shareholder class actions lawsuits.22 Section C also examines the nature of these shareholder class action lawsuits, in particular how they are now brought following almost every merger or acquisition. …