* 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 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)