Big pension funds mobilize against Delaware fee-shifting clauses

November 26, 2014

Last June, when Delaware’s General Assembly was contemplating legislation to prohibit fee-shifting provisions that would require shareholders to pay defense costs for failed suits, the U.S. Chamber of Commerce’s Institute for Legal Reform moved fast. The Chamber sent a letter to the bill’s sponsor, Bryan Townsend, arguing that the proposed law be deferred. It also wrote to all of the members of the Assembly to urge them to oppose the legislation. Fee-shifting, according to the Chamber, was a great way to curtail meritless shareholder claims in “deal tax” suits. Why, the Chamber asked, would lawmakers “deprive” shareholders of the “opportunity” to rein in frivolous litigation?

The Chamber’s lobbying worked. The fee-shifting prohibition proposal had been drafted by the state bar’s corporation law section, in response to a ruling by the Delaware Supreme Court that seemed to endorse fee-shifting. Typically, according to my Reuters colleague Tom Hals, when the state bar backs a proposed law, Delaware legislators pass it. But not this time. Delaware lawmakers tabled the proposed law just a few days after the Chamber sent its letters. “Delaware truly respects the views of the business community,” bill sponsor Townsend told the Wilmington News-Journal.

Institutional investors want to be sure that when the legislature reconsiders fee-shifting, their voices are as loud as the Chamber’s. This week, the Council of Institutional Investors (CII) and a coalition of big public pension funds from California, New York, Florida, Texas, North Carolina and several other states sent letters to Delaware governor Jack Markell; the previous bill’s sponsor, Townsend; the chair of the state bar’s corporation law section, Norman Monhait of Rosenthal, Monhait & Goddess; and the shareholder advisory services Glass Lewis and Institutional Shareholder Services. They contend that fee-shifting bylaws are bad corporate governance that, in the long run, will discourage investment in Delaware corporations and undermine the legitimacy of Delaware courts.

“We are at a critical juncture,” said CII general counsel Jeff Mahoney. The Delaware bar’s corporation law group is once again discussing fee-shifting legislation, which could come up for debate in the legislature as soon as February. Institutional investors, Mahoney said, were determined to share their conviction that fee-shifting provisions diminish corporate accountability to shareholders.

So far, big U.S. corporations have been reluctant to adopt fee-shifting clauses. Lee Rudy of Kessler Topaz Meltzer & Check put together a list for CII of companies that have enacted provisions to restrict shareholder litigation. Of the three dozen or so, only Alibaba, the Chinese online retailer, is a household name. Rudy told me that corporations may be waiting to see what the Delaware legislature says about fee-shifting, or may be reluctant to adopt provisions until they are endorsed by Chancery Court. (The decision that implied the provisions are legal, ATP Tour v. Deutscher Tennis Bund, involved a non-stock corporation.) If Delaware lawmakers or judges say explicitly that fee-shifting is legal for companies with public shareholders, Rudy said, “you’ll see a flood of these bylaws.”

That’s why institutional investors have spoken up, he said. The public pension funds that signed the letters are responsible for trillions of dollars of investor money. The funds, Rudy said, “certainly hope” lawmakers will pay attention to what they have to say.

I left messages for bar committee chairman Monhait and for folks at the Chamber’s Institute for Legal Reform. Neither got back to me.

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