Of Babies and Bathwater: Deterring Frivolous Stockholder Suits Without Closing the Courthouse Doors to Legitimate Claims

42 Pages Posted: 16 Mar 2015 Last revised: 6 Apr 2015

See all articles by Mark Lebovitch

Mark Lebovitch

Bernstein Litowitz Berger & Grossmann LLP

Jeroen van Kwawegen

Bernstein Litowitz Berger & Grossmann LLP

Date Written: March 16, 2015

Abstract

The Delaware Supreme Court’s May 8, 2014 Opinion in ATP Tour marked a sudden and potentially transformative moment in the relationship among corporate boards, their stockholders, and the Delaware legal system. This article observes that failure to legislatively override the ATP precedent is likely to eliminate all but the most unusual types of stockholder litigation. The authors juxtapose the evolution of the pertinent jurisprudence with the backdrop of an increase in the volume of deal-related stockholder litigation. Notably, on March 6, 2015, the Delaware Corporation Law Council proposed a recommended amendment to the DGCL to legislatively overrule ATP, to the extent it would apply to public companies. The Council’s proposal is generally consistent with the core conclusion of this article, which consolidates the legal and policy reasons for Delaware legislators and pertinent commentators to support the proposal.

The article asserts that the “nuclear option” of allowing boards of public companies to employ fee-shifting bylaws against stockholders whose interests they are supposed to represent is poor policy and departs from well-established legal principles. Moreover, such a draconian use of corporate power is not needed to curtail the problem of frivolous lawsuits that achieve no material benefit for stockholders while providing corporate defendants with broad releases. In opposing fee-shifting bylaws, the authors provide legal and policy reasons not to permit bylaws or charter provisions to be used to impede fundamental stockholder rights, including the right to enforce fiduciary duties through litigation. Furthermore, the authors propose an alternative to fee shifting to reduce the number of cases that provide no material benefit to stockholders and put a strain on corporations and the judiciary.

Keywords: Corporations, Delaware General Corporation Law, DGCL, fee shifting provisions, litigation-limiting bylaws, charters, fiduciary duties, ATP Tour, Inc. v. Deutscher Tennis Bund, Delaware Corporation Law Council

Suggested Citation

Lebovitch, Mark and van Kwawegen, Jeroen, Of Babies and Bathwater: Deterring Frivolous Stockholder Suits Without Closing the Courthouse Doors to Legitimate Claims (March 16, 2015). Delaware Journal of Corporate Law (DJCL), Vol. 40, 2015. Available at SSRN: https://ssrn.com/abstract=2578884 or http://dx.doi.org/10.2139/ssrn.2578884

Mark Lebovitch (Contact Author)

Bernstein Litowitz Berger & Grossmann LLP ( email )

1285 Avenue of the Americas
New York, NY 10019
United States

Jeroen Van Kwawegen

Bernstein Litowitz Berger & Grossmann LLP ( email )

1285 Avenue of the Americas
New York, NY 10019
United States

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