Companies try to herd shareholder suits to Delaware

Fri May 20, 2011 9:43am EDT

* Companies fighting sprawl of similar lawsuits

* Shareholders asked to make Delaware main legal forum

* Proposal has hit bumps in court and shareholder votes

By Tom Hals

WILMINGTON, Del., May 20 (Reuters) - When International Coal Group Inc (ICO.N) announced plans this month to sell itself, investor lawsuits challenging the deal were quickly filed in state courts in Delaware and West Virginia as well as in federal court.

If corporate America has its way, such lawsuits could get reined in significantly. Companies including Berkshire Hathaway Inc (BRKa.N) (BRKb.N) and newly public social networking site LinkedIn Corp (LNKD.N) already have adopted rules to force deal challenges into one court, with many pushing for Delaware as the sole venue.

The business community has an unlikely ally in its fight to rein in the litigation: some top plaintiffs' lawyers who also think the lawsuits are getting out of hand.

However, not everyone agrees on the best solution, and in one of the first shareholder votes on an "exclusive forum" proposal to govern where lawsuits can be brought, stockholders at Allstate Corp (ALL.N) this week shot it down.

The multiple lawsuits against International Coal Group are an example of the litigation that can follow a corporate deal.

After agreeing to be bought for $3.4 billion by Arch Coal (ACI.N) on May 2, International Coal's board of directors was sued for allegedly breaching its fiduciary duties by selling too cheaply. Cases were brought in Delaware, where the company is incorporated, and West Virginia, which it calls home.

International Coal did not return a call for comment.

Such lawsuits often argue that boards and management are too quick to strike deals that set them up for handsome payouts but shortchange shareholders. Companies often settle these cases, viewing them as nuisance lawsuits.

Parallel cases filed in various courthouses have become "more the rule than the exception," said Stephen Lamb, a former Delaware Chancery judge and now a partner with Paul, Weiss, Rifkind, Wharton & Garrison LLP in Wilmington.

Identical cases in different courts have increased for several reasons. Some lawyers view Delaware, where most U.S. listed companies are incorporated, as less friendly to shareholders. They might want to sue a company with a big local presence in a nearby court, hoping to get a better hearing.

Others tie the trend to attorneys who go to state courts in hopes of leading the case as the first plaintiff to file.

A TAX ON PLAINTIFFS

Some plaintiffs' counsel take a dim view of the trend, saying it bogs down the system and can create chaos among the legal teams working for shareholders.

"There's nothing inherently wrong with a shareholder suing a company in its hometown," said Mark Lebovitch, of law firm Bernstein Litowitz Berger & Grossmann LLP. "But competing multijurisdiction cases of this kind can undermine each other, harming the interests of shareholders."

Delaware judges say parallel cases can drive down settlements for investors as companies' lawyers pit plaintiffs against one another. The phenomenon has led to plaintiffs in different courts opposing each other's settlements.

"From the plaintiffs' side, it's a tax," said Stuart Grant, a shareholder lawyer at law firm Grant & Eisenhofer P.A. in Wilmington. "All the cases filed want to share the attorneys' fees despite the fact they didn't do any work."

Other attorneys downplay the problem and argue the "exclusive forum" measures allow companies to shop for a friendly court while denying the same right to shareholders. They note there have been few if any instances where two courts applied Delaware law differently in the same case.

"I think it's an overreaction to really a nonexistent concern," said George C. Aguilar, of law firm Robbins Umeda LLP in San Diego.

The number of companies with exclusive forum provisions has jumped from two to more than 80 since March 2010, when Delaware Chancery Judge Travis Laster suggested in a legal opinion that if directors and stockholders want a particular court then companies should try to put the provision in their charters.

The change has not been without problems. Earlier this year a federal judge in California refused to move a lawsuit involving Oracle Corp ORCL.O to Delaware because the directors, the defendants in the lawsuit, changed the bylaws without a shareholder vote.

Only four companies have had shareholder votes on the matter. Life Technologies Corp LIFE.O tied it to corporate governance changes that won an endorsement from Institutional Shareholder Services, which advises pension funds on proxy votes. It passed easily.

Allstate shareholders, though, shot down the proposal on Tuesday, and the provision passed with only slim majorities at DirecTV (DTV.O) Altera Corp (ALTR.O). ISS opposed the measure at all three. It said the proposal was still so new it was continuing to study it.

Lebovitch said it was telling that so few companies have put the issue to a shareholder vote.

"I think it's just not a good idea. There are unintended consequences of basically creating for Delaware a monopoly on corporate governance law." (Reporting by Tom Hals, editing by Dave Zimmerman)

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