November 18, 2014
Bainbridge on Fee-Shifting Bylaws
Posted by Usha Rodrigues

5 days ago the WSJ published an opinion piece on Delaware's fee shifting bylaws.  I read it with interest, thinking "Maybe I should blog about that."  Life intervened. In the meantime, my friend Steve Bainbridge posted not one, but two blogposts--footnoted, no less--on the topic. 

I feel dispiritingly inadequate.  But I also feel hearteningly efficient: Steve's made my work easier by first describing the fee-shifting bylaw on the merits (first post), and then applying an interest group analysis (second post)

You should read both Steve's posts, but what grabs me is the interest-group question.  Steve takes as his starting point Larry Ribstein's riff on Macey & Miller's article, which is a candidate for the single law review article that most changed my view of corporate law.  Usually at the end of my Corporations class's discussion of the duty of good faith, I say something like, "Yes, it's fuzzy. Maybe it's supposed to be..."  Cue M&M:

Delaware could stimulate litigation by supplying legal rules that are unclear in application. The bar therefore has some interest in reducing the clarity of Delaware law to enhance the amount of litigation. But the bar risks killing the proverbial goose that laid the golden egg because it is primarily the certainty and stability of Delaware law that creates the opportunities for profits in the first place. The bar as a whole does not have an interest in making the law so unclear that corporations begin to move elsewhere in large numbers. The bar should instead favor an equilibrium point of uncertainty at which the marginal increase in bar revenues from litigation fees equals the marginal loss in revenues due to reduced incentives to incorporate in Delaware.

By this point in the semester I've waxed rhapsodic to my class about Delaware law. So I feel some guilt at disillusioning them by suggesting that the indeterminacy that so bedevils them  and their outlining efforts may be by design.  I can't help it, though.  It's too much fun.

I digress.  Steve's second post first asserts that:

Both sides of the litigation bar thus have a strong interest in banning fee shifting bylaws. Such bylaws would raise plaintiff costs, deterring lawsuits, reducing fees for all litigators.

To which I say, "Amen, brother."  But then Steven suggests that

All corporate lawyers—litigators and transactional—have a strong incentive to oppose fee shifting bylaws. Hence, it was no surprise that the Delaware legislature—dominated in this area by the Delaware bar—leaped to ban such bylaws. The business groups that favor fee shifting bylaws were able to delay that action. But the final decision remains pending.

But that's not quite true, right?  Certainly litigators want litigation.  But deal lawyers don't want it--at least, not this particular kind of litigation.  Indeterminacy over doctrinal areas like good faith is good for transactional types as well as litigators, because it gives them more nuances and risks to have to explain at length to boards as they advise on various types of action.  The type of fee-shifting bylaw we're discussing, in contrast, is bad for deal lawyers--at least, if you think, as Steve does, that

There is a serious litigation crisis in American corporate law. As Lisa Rickard recently noted, “where shareholder litigation is reaching epidemic levels. Nowhere is this truer than in mergers and acquisitions. According to research conducted by the U.S. Chamber Institute for Legal Reform, lawsuits were filed in more than 90% of all corporate mergers and acquisitions valued at $100 million since 2010.” There simply is no possibility that fraud or breaches of fiduciary duty are present in 90% of M&A deals. Instead, we are faced with a world in which runaway frivolous litigation is having a major deleterious effect on U.S. capital markets.[23]

If these suits amount to nothing more than a litigation tax on deals, then they discourage deals.  And that's bad for deal lawyers.

Steve's posts left me with 2 questions:

  • Small bore: Where are Delaware's transactional lawyers? 
  • Large bore: Will Delaware really be so short-sighted as to kill its corporate franchise goose?

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