Business presses Delaware for loser-pays option in class actions

WILMINGTON, Del., June 10 Tue Jun 10, 2014 1:48pm EDT

WILMINGTON, Del., June 10 (Reuters) - Big business is lobbying Delaware lawmakers for corporate bylaws to shift legal fees to shareholders who sue and lose, which legal experts said could curtail a booming type of investor class actions.

An affiliate of the U.S. Chamber of Commerce urged the Delaware General Assembly on Monday to defeat a bill in the state's legislature that would bar "loser pays" corporate bylaws.

The bill was drafted in response to a Delaware Supreme Court ruling on May 8 in a case involving ATP Tour Inc, which oversees men's professional tennis. The court ruling held that such bylaws were valid and could be adopted to discourage litigation.

"The Delaware Supreme Court's ATP decision gives corporations a way to protect their shareholders against these costs of abusive litigation," said Lisa Rickard, president of the Institute for Legal Reform, in a letter to lawmakers. "Why would the Legislature so quickly deprive shareholders of the opportunity to obtain that protection?"

In U.S. litigation, both parties usually pay their own legal costs.

The bill was drafted with the backing of the state's bar association. Bryan Townsend, a Democratic state senator who sponsored the bill, told Reuters it had been pulled from Tuesday's Senate agenda to consider input from businesses.

Most legislation backed by the bar is adopted and Townsend said he expected his bill would become law.

It must be approved by Delaware's House and Senate and be signed by Governor Jack Markell.

Markell's office did not immediately respond to a request for comment.

The majority of U.S. companies with publicly traded stock are chartered in Delaware, which provides revenue that makes up as much as 40 percent of the state's general budget.

Delaware corporations have access to the state's courts and Delaware's corporate law govern relations with shareholders through a company's corporate bylaws.

Few, if any, companies have adopted loser-pays bylaws. Townsend said it was inaccurate for the Chamber of Commerce to call the bill anti-business since it merely reflected current practice.

Still, law firms have been firing off client memos to drum up awareness of the little-noticed ATP case.

ATP, which incorporated in Delaware, had been trying to collect $17.7 million in legal fees from members who unsuccessfully sued its directors over the tour schedule. The federal judge overseeing the case asked the Delaware Supreme Court to weigh in on the validity of ATP's fee-shifting bylaw.

While ATP is a non-stock organization, legal experts said the ruling would likely apply to stock corporations.

The ATP ruling was welcomed by big business groups that have been pressing for ways to rein in investor class action lawsuits in state courts.

Merger deals set off hundreds of the lawsuits annually, often accusing directors of agreeing to sell their company too cheaply. Nearly all of them settle for nothing but the Institute for Legal Reform, the Chamber affiliate that wrote to Delaware lawmakers, has called the lawsuits "extortion through litigation." (Reporting by Tom Hals in Wilmington, Delaware; Editing by Tom Brown)