Corporate

More on ATP and Fee-Shifting

 Stephen Bainbridge weighs in on fee-shifting bylaws and makes the argument that they are necessary to resolve the litigation crisis:

There is a serious litigation crisis in American corporate law. As Lisa Rickard recently noted, “where shareholder litigation is reaching epidemic levels. Nowhere is this truer than in mergers and acquisitions. According to research conducted by the U.S. Chamber Institute for Legal Reform, lawsuits were filed in more than 90% of all corporate mergers and acquisitions valued at $100 million since 2010.” There simply is no possibility that fraud or breaches of fiduciary duty are present in 90% of M&A deals. Instead, we are faced with a world in which runaway frivolous litigation is having a major deleterious effect on U.S. capital markets.

Fee shifting bylaws are an appropriate means of addressing the problem through private ordering. On the one hand, they likely will prove an effective deterrent to frivolous litigation:

Fee-shifting bylaws, if widely adopted, would raise the risk associated with filing these lawsuits and could weed out the weakest ones, said Sean Griffith, a professor at Fordham University's law school.

“This could be a gut check for plaintiffs' lawyers,” Mr. Griffith said. “They would have to ask—for the first time, really—how good is my case?”

It is, of course, a question that plaintiff lawyers should have been asking all along. The problem, of course, is that they never do.

On the other hand, bylaws are subject to shareholder amendment, so the most likely result will be a process of give and take between directors and shareholders that results in bylaws whose terms are broadly acceptable to the key constituencies (other than lawyers, of course).

I'm of two minds on fee-shifting. First, clearly shareholder litigation, particularly transaction-related litigation is out of control. Something needs to be done so that litigation is not just a transactions tax.  On the other hand, there are examples of valid suits where plaintiffs have rooted out real fiduciary violations of directors. There is value in ensuring some level of oversight with respect to board actions, but how much? Fee-shifting strikes me as using a sledgehammer to pound in a nail: effective, but necessary? I don't have an answer for that right now, I'm looking for a smaller hammer though.

  Visit the M&A Law Prof Blog, hosted by Brian JM Quinn, for blogs on legal developments in corporate governance and mergers & acquisitions.

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