(Reuters) – On Monday, a Delaware shareholder firm issued a press release urging shareholders of the dental laser company Biolase to get in touch if they’re concerned about allegations that board members leaked corporate financials, among other supposed shenanigans. You know what that means: Class action firms are circling the beleaguered company, looking for a reason to file a shareholder derivative suit accusing Biolase’s board of breaching its duties.
Meanwhile, Biolase’s former chairman and CEO — ousted in June after months of fighting in Delaware courts to keep his job — has sent a demand for books and records to the company’s board. Deposed CEO Federico Pignatelli claims that his fellow Biolase directors are working for their own interests, not for shareholders. Represented by Baker Marquart, he’s spoiling to keep litigating against the directors who tossed him out.
That’s a risky proposition for Pignatelli and for Delaware shareholders. At the same June 26 meeting at which the board got rid of Pignatelli, Biolase became one of the first public companies in Delaware to adopt a “loser pays’ fee-shifting bylaw.
As you probably recall, the Delaware Supreme Court ruled in May that state corporate law permits companies to shift the cost of defending shareholder suits to investors whose cases fail. The Biolase “loser pays” bylaw is a variation on that theme: It’s not directed at all shareholders who sue the board, but only at current or former directors (or anyone acting at their behest) who assert unauthorized claims against the board.
The bylaw was obviously enacted with Pignatelli in mind. Under its terms, if Pignatelli sues his fellow Biolase directors and loses, he’s on the hook for their defense costs. More significantly for the Delaware shareholder bar, if Pignatelli challenges the validity of the Biolase fee-shifting bylaw and loses, more public corporations will be emboldened to enact loser pays provisions. That would be bad news for Delaware shareholders who count on enforcing their rights through litigation.