The Trouble with Trulia: Re-Evaluating the Case for Fee-Shifting Bylaws as a Solution to the Overlitigation of Corporate Claims

80 Pages Posted: 5 Apr 2017

See all articles by William Chandler

William Chandler

Wilson Sonsini Goodrich & Rosati

Anthony A. Rickey

Margrave Law LLC

Date Written: April 4, 2017

Abstract

Responding to an increase in deal litigation “beyond the realm of reason” in the early part of the 21st century, Delaware’s legal community struck a grand bargain with its corporate citizens. First, the legislature prohibited Delaware stock corporations from enacting fee-shifting bylaws or articles, which some saw as threatening Delaware’s legal community, and others—including the Delaware State Bar Association (“DSBA”) and the plaintiffs’ bar—considered to be “throwing the baby out with the bathwater.” Second, the DSBA explicitly encouraged greater scrutiny of intracorporate litigation by judges, and the adoption of forum selection bylaws by corporations, to reduce the incidence of socially wasteful litigation. Within seven months of the ban on fee-shifting, the Delaware Court of Chancery issued the Trulia decision, widely seen as a promising corrective to the problem of excessive corporate litigation, and in particular disclosure-only settlements.

Almost a year later, there is reason to doubt whether this grand bargain will be sufficient to address the problem. Over sixty percent of major deals remain subject to litigation. Forum selection clauses have not served as a panacea: as critics noted at the time, they have granted an option to corporate defendants, who may choose to waive such provisions if offered a favorable settlement outside of Delaware. In the meantime, these provisions may well have revitalized deal litigation under federal law, with plaintiffs bringing securities cases against corporate defendants that have adopted forum selection clauses. Although Delaware courts have acted to rein in disclosure settlements, few courts in other jurisdictions have followed suit. This slow take-up of Trulia outside of Delaware is a result, at least in part, of the non-adversarial process that Trulia set out to correct, as parties presenting disclosure settlements outside of Delaware have little reason to cite newer Delaware authority.

Against this backdrop, we argue that if Trulia fails to eradicate the problem of socially detrimental litigation, Delaware should reconsider its prohibition on fee-shifting bylaws.

Suggested Citation

Chandler, William and Rickey, Anthony A., The Trouble with Trulia: Re-Evaluating the Case for Fee-Shifting Bylaws as a Solution to the Overlitigation of Corporate Claims (April 4, 2017). Available at SSRN: https://ssrn.com/abstract=2946477 or http://dx.doi.org/10.2139/ssrn.2946477

William Chandler (Contact Author)

Wilson Sonsini Goodrich & Rosati ( email )

650 Page Mill Rd
Palo Alto, CA 94304-1050
United States

Anthony A. Rickey

Margrave Law LLC ( email )

8 West Laurel Street, Suite 2
Georgetown, DE 19947
United States

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