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Delaware Bans 'Loser Pays' Rules in Corporate Class Actions

June 29, 2015 | Posted in : Defense Fees / Costs, Fee Shifting, Legal Bills / Legal Costs, Legislation / Politics

A recent Reuters story, “Delaware Bans ‘Loser-Pays’ Rules in Corporate Class Actions,” reports that Delaware's governor has signed into law a ban on companies adopting rules that could force investors who bring and lose certain lawsuits to pay the company's defense fees.

However, Delaware lawyers feared fee-shifting would effectively wipe out shareholder litigation and the ability to police corporate boards.  The bill, signed by Governor Jack Markell, applies to lawsuits brought under the state's corporate law, which governs most U.S. publicly traded companies and their relations with investors.

Companies with fee-shifting bylaws would have had grounds to seek to recoup legal defense costs.  Traditionally each party in U.S. litigation pays its own way regardless of the outcome.  Debate over the tactic began in May 2014 when the Delaware Supreme Court ruled in a case involving ATP Tour Inc that fee-shifting provisions were not invalid and might be a permissible way to discourage litigation.

To placate big business, the new law allows companies to adopt rules that require investors to sue in Delaware, a tactic known as forum selection.  Supporters argue that corralling lawsuits in Delaware allows the state's judges to weed out weak cases without fear that investors would file in a court in another state, usually where the company has its operations.

Class actions challenging merger deals have become a sore point for business groups.  Small investors often file multiple cases over every deal, and while only rare cases result in money for investors, they often generate hundreds of thousands of dollars for the shareholder attorneys.

While the new law was the target of an unusually intense lobbying campaign and a rare close vote in the state's Senate, experts said it may not change much.  For one, only about three dozen mostly small companies adopted fee-shifting tactics since the ATP ruling.

Shareholder lawyers said concentrating the class actions in Delaware might improve procedures for handling the cases, but not much else.  "I don't know that it achieves getting rid of weak cases," said Juan Monteverde of Faruqi & Faruqi, who specializes in class actions.