derivative action

An Exercise of Business Judgment: Chancery Court Dismisses Shareholder Derivative Demand-Refused Case

Gavel and Hundred-Dollar Bill

Last week, Vice Chancellor Glasscock released an important decision dismissing a case under Rule 23.1 that was brought by a DuPont shareholder who alleged that the board improperly refused a demand to sue DuPont’s officers and directors.  The suing shareholder alleged that the individual defendants caused DuPont to incur sanctions in, and eventually lose, a patent-infringement case brought by Monsanto concerning DuPont’s unauthorized use of Monsanto’s patents.

The Delaware court held that the plaintiff had not adequately alleged that DuPont’s board of directors had been unreasonable or acted in bad faith in rejecting a demand to sue the directors and officers who were purportedly responsible for DuPont’s liability in the Monsanto patent litigation.

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Oklahoma Takes a Stand a Stand in the Battle Over Derivative Fee-Shifting

Back in May we discussed ATP Tour, Inc. v. Deutscher Tennis Bund a seminal Delaware Supreme Court case that upheld a non-stock corporation’s “loser pays” fee-shifting bylaw.  ATP Tour held that where a Delaware corporation adopts a fee-shifting bylaw, it can recover its fees and costs from any shareholder that brings a derivative lawsuit and loses.  Many commentators have suggested the case would effectively kill derivative actions in Delaware and indeed, since the time of that decision, the Delaware Corporation Law Council has proposed amendments to the Delaware General Corporation Law that would limit its applicability to only non-stock corporations.

Last week the Oklahoma State Legislature went a step further than ATP Tour and amended the Oklahoma General Corporation Act to specifically require fee-shifting for all derivative lawsuits brought in the state, whether against an Oklahoma corporation or not.  Unlike the fee provision in ATP Tour, however, the law also affords derivative plaintiffs the right to recover their fees and costs should they win final judgment.

The difference is likely substantial.  For while the law will potentially chill unmeritorious derivative actions, also known as “strike suits,” it could also provide an incentive for derivative plaintiffs with strong claims.  Where shareholders use the “tools at hand”—including books and records inspection requests—to carefully vet their claims before filing, the promise of a fee recovery could encourage shareholder plaintiffs to bring claims they otherwise might not.

Consider:  in the typical derivative lawsuit, the shareholder plaintiff stands to gain nothing tangible if he or she wins.  Because he or she is suing on behalf of the corporation, any recovery will inure to the corporation itself.   Thus, under the old regime, even if a derivative lawsuit was successful, the plaintiff would receive, at most, any resulting increase in the value of his or her company stock.  Under the new statute, that same plaintiff could stand to receive the not-insubstantial costs of his or her efforts.

Is the Free Lunch Ending for Stockholders Who Sue Corporations? Fee-Shifting Introduced in Intra-Corporate Litigation

Gavel and Hundred-Dollar Bill

ATP Tour: The Little Case That Could

On May 8, 2014 the Delaware Supreme Court upheld a “loser pays” fee-shifting bylaw for a Delaware non-stock corporation in ATP Tour, Inc. v. Deutscher Tennis Bund.  While the decision was released with little heralding, if ATP Tour’s “loser pays” provisions are widely adopted by public corporations and held also to be valid, the decisionmay create a significant impediment to the ubiquitous lawsuits alleging that directors have breached their fiduciary duties of loyalty and care to the corporation.

The board of ATP Tour, a membership organization that operates men’s professional tennis competitions, enacted a fee-shifting bylaw which provides that a “Claiming Party,” i.e. a member organization, would be liable for the corporation’s attorneys’ fees and other litigation expenses if it loses in an intra-corporation claim against the company.  The fee-shifting bylaw obligates any Claiming Party to reimburse the League and any member or owner of ATP Tour that the Claiming Party also sued. READ MORE