March 19, 2015 / 5:06 PM / 4 years ago

SEC chair says concerned about fee-shifting bylaws

A general exterior view of the U.S. Securities and Exchange Commission (SEC) headquarters in Washington, June 24, 2011. REUTERS/Jonathan Ernst

WASHINGTON (Reuters) - Corporate bylaws that force shareholders to pick up their company’s legal tab if they lose the case could be stifling shareholders’ rights and must be closely watched, Securities and Exchange Commission Chair Mary Jo White said on Thursday.

“I am concerned about any provision in the bylaws of a company that could inappropriately stifle shareholders’ ability to seek redress under the federal securities laws,” White said in prepared remarks for Tulane University Law School’s annual Corporate Law Institute.

White was referring to the recent fallout from a May decision by the Delaware Supreme Court, in which the court upheld the bylaws of ATP Tour Inc, a private corporation that was seeking to collect $17.7 million in legal fees from members who unsuccessfully sued its directors.

The decision has upended the doctrine of the so-called “American rule,” which says that each party in shareholder litigation should pay for its own legal costs.

White cited a report that found at least 40 companies have adopted some form of fee-shifting bylaws since then. One such company, for instance, is Chinese e-commerce giant Alibaba Group Holding Ltd.

White declined to say whether she approves of these changes or whether the SEC might weigh in by filing an amicus brief.

However, she said the SEC is carefully scrutinizing disclosures by companies that adopt fee-shifting bylaws to make sure they are adequate.

“If a company chooses to adopt a fee-shifting provision, it should clearly communicate to shareholders the specific features of the provisions and its effect on shareholders’ ability to bring a claim,” she said.

In addition, White said she is leaving the door open to possibly intervene if the SEC later decides the bylaws are trampling shareholders’ rights.

Reporting by Sarah N. Lynch; Editing by Eric Beech and Susan Heavey

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