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An ever-present anxiety for globally-active non-U.S. companies is the possibility that they might find themselves having to deal with litigation in U.S. courts. This concern is warranted because certain attributes of the U.S. legal system – including the absence of loser pays attorneys’ fee model and the availability of discovery and jury trials – provide substantial incentives for prospective plaintiffs to try to pursue their claims against foreign companies in U.S. courts.
However, there have been a number of significant recent legal developments that have reduced the ability of plaintiffs to subject foreign companies to litigation in the U.S. In addition, the possibility that corporate adoption of fee-shifting bylaws might mitigate the effects of the absence of a “loser pays” model has recently gained significant momentum.
These two subjects – the recent U.S. judicial developments affecting the exposure of foreign companies to U.S. litigation and the upsurge in the adoption of fee-shifting bylaws – are the topics of two recent legal surveys, discussed below.
Litigation in U.S. Courts against Foreign Companies
An October 2014 U.S. Chamber of Commerce Institute for Legal Reform publication entitled “Federal Cases from Foreign Places: How the Supreme Court Has Limited Foreign Disputes from Flooding U.S. Courts”(here) takes a look at “the current and swiftly shifting legal landscape of federal claims by foreign plaintiffs in the federal courts.” The organization’s October 21, 2014 press release about the publication can be found here.
In the introduction to the publication, which contains a series of four essays by leading legal practitioners about recent developments in this area, the editors suggest that “the tide” against attempts to have U.S. courts adjudicate disputes that arose overseas “might finally be receding.” As detailed in the essays, several recent court decisions “restrict the territorial reach of U.S. laws and impose more rigorous standards for demonstrating personal jurisdiction over defendants.”
The first of the four essays in the publication, entitled “Morrison at Four: A Survey of Its Impact on Securities Litigation” and written by George Conway III of the Wachtell Lipton law firm, takes a look at the effects of the U.S. Supreme Court’s 2010 decision in Morrison v. National Australia Bank [an enhanced version of this opinion is available to lexis.com subscribers]. Conway also summarized his essay about Morrison in an October 29, 2014 post on the Harvard Law School Forum on Corporate Governance and Financial Regulation (here).
As Conway notes, the U.S. Supreme Court’s decision in Morrison “reemphasized the presumption against extraterritoriality,” and reestablished “the traditional understanding that Congress ordinarily legislates with respect to domestic, not foreign, matters,” consistent with principles that would “avoid the interference with foreign regulation that the extraterritorial application of U.S. law would produce.”
Conway also notes that lower courts applying Morrison have effectively extinguished “two species” of cases that had ensnared foreign companies in U.S. lawsuits for damages under the federal securities laws. First, Morrison has put an end to so-called “f-cubed” cases, involving claims by foreign domiciled plaintiffs who purchased their shares in foreign companies on foreign exchanges. Second, Morrison has also put an end to “f-squared” cases, involving the claims of U.S. plaintiffs who purchased their shares in foreign companies on foreign exchanges.
Conway then goes on to review more recent cases where the lower courts have applied Morrison to cases involving other kinds of transactions, such as derivative securities transactions. As discussed here, in its August 2014 decision in the securities class action lawsuit involving Porsche, the Second Circuit held that a domestic transaction is a necessary but not necessarily a sufficient condition for a claim to fall within the territorial scope of Section 10(b).
Conway concludes by noting that as case law under Morrison continues to develop, courts will “increasingly face the harder cases, the marginal cases, cases in which the question whether the proposed application of law is extraterritorial is less clear and that turn on thorny factual disputes about where particular events occurred.” These difficult cases will “pose interesting questions of line-drawing and fact-finding,” but their difficulty should not undermine the “the wisdom of the presumption against extraterritoriality.”
The U.S. Chamber of Commerce’s publication concludes with an afterword noting that despite important recent developments, “plaintiffs’ attorneys continue to try to drag nonresident companies into their favorite forums” and that “opportunities for global forum shopping endure.” Nevertheless, the editors conclude, the recent legal developments outlined in the publication “should help courts and defendants more efficiently week out international lawsuits that never should have been imported into the United States in the first place.”
Developments Involving Fee-Shifting Bylaws
One of the most significant recent developments in the world of corporate and securities litigation has been the rising numbers of companies adopting fee-shifting bylaws. These moves followed quickly after the Delaware Supreme Court’s May 2014 ruling in the ATP Tour, Inc. v. Deuscher Tennis Bund case (discussed here) upholding the validity of a non-stock organization’s bylaw requiring an unsuccessful litigant in an intra-corporate dispute to pay his adversary’s legal fees [enhanced version]. Many companies have moved to adopt similar bylaws even though legislation is pending in the Delaware legislature to restrict the use of fee-shifting bylaws to non-stock companies. As I recently noted, an increasing number of IPO companies completing their public stock offerings have these types of provisions in their bylaws.
The widespread adoption of fee-shifting bylaws could work a fundamental change in what has been called the “American Rule,” which provides that in the U.S. each party to a lawsuit bears its own costs. The fee-shifting bylaws institute something closer to the “loser pays” model that prevails in many countries outside of the U.S.
The recent rise and implications of fee-shifting bylaws is the subject of a “roundtable” in the November 2014 issue of the Bank and Corporate Governance Law Reporter (here). The roundtable includes a series of four essays discussing the fee-shifting bylaw phenomenon.
The first essay is by Columbia Law School Professor John C. Coffee Jr. and entitled “Fee-Shifting and the SEC: Does it Still Believe in Private Enforcement?” The essay is the written form of testimony Coffee provided at an October 9, 2014 SEC Investor Advisory Committee. The essay was previously published in an October 14, 2014 post on The CLS Blue Sky Blog (here).
In his essay, Coffee notes that as a result of the sudden upsurge in the adoption of fee-shifting bylaws, corporate law is now in the midst of a period of “rapid change,” and he notes that the pace of the change is “accelerating.” Coffee clearly has concerns with this development, and he contends that even if Delaware acts to limit the restrict the adoption of fee-shifting bylaws, the SEC should still act to curtail the adoption of these types of measures.
As Coffee sees it, the adoption of these kinds of bylaws has several faults. First, he says, the bylaws often are one-sided in that they reimburse successful defendants but not successful plaintiffs, and they require fee-shifting even in cases that were reasonable or even meritorious but that were lost on a technical legal defense. He also notes the perverse incentives the bylaws create, in that the stakes for an unsuccessful plaintiff increase the harder and the longer the plaintiff fights, possibly encouraging early settlements of meritorious cases.
Coffee also sees the bylaws as inconsistent with Congressional attitudes against fee-shifting in class action cases, which, Coffee contends, evince a preference for two-sided fee-shifting subject to judicial review rather than an automatic system of one-way fee-shifting.
Coffee concludes by saying that “Delaware alone cannot solve the problem” because even if Delaware restricts the practice, other states might allow it (as, for example, Oklahoma already has), which could trigger a “race to the bottom.” Coffee states that unless the SEC acts, these kinds of provisions “could become prevalent.”
Coffee suggests that there are a number of steps the SEC could take, including, for example, refusing to accelerate the registration statements of companies that have fee-shifting bylaws (as the agency previously has done with companies that have bylaws with mandatory arbitration clauses). He also suggests that the agency could require registrants to state in the registration statements that the SEC believes the federal securities laws are inconsistent with fee-shifting bylaws. The SEC could also require disclosure of these kinds of bylaws in companies’ risk factors, “thereby raising the ‘embarrassment cost’ to the issuer.”
In the second essay in the roundtable, Widener Law School Professor Larry Hamermesh argues that while fee-shifting bylaws may have a legitimate purpose of “deterring litigation,” the Delaware legislature should preclude broad bylaws adopted after shareholders have invested because those shareholders did not consent to the bylaw adoption and because the bylaws run against traditional shareholder expectations to be able to enforce fiduciary obligations.
In the third essay, the roundtable editor, Neil Cohen, argues that shareholder “consent” to fee-shifting bylaws can only be determined by shareholder vote. He also argues that shareholder should have a legal remedy when wrongdoing occurs but that a fee-shifting bylaw could prevent meritorious cases from being filed. In order to allow meritorious cases to proceed but to discourage frivolous lawsuits, Cohen suggests that the Delaware legislature require that fee-shifting bylaws are invalid after plaintiffs have survived a motion to dismiss and requiring that defendants should be required to pay plaintiffs fees when plaintiffs prevail.
In the roundtable’s final essay, former SEC Chairman Harvey Pitt suggests that fee-shifting bylaws should remain the province of state law and of the board. He suggests that the Delaware legislature should require boards to appoint special committees to consider a host of key factors and to enlist the assistance of experts in order to arrive at fair bylaws. Pitt also argues that a shareholder vote should be required for the adoption of a fee-shifting bylaw and that one-sided fee shifting should not be allowed.
Special thanks to Neil Cohen for sending me a link to the fee-shifting roundtable.
Read other items of interest from the world of directors & officers liability, with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
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