Delaware Supreme Court Upholds 'Loser Pays' Bylaw

The Delaware Supreme Court on May 8 upheld a private company’s bylaw that shifts fees for shareholder lawsuits to the losing party. The ruling likely will encourage other companies to adopt similar bylaws in an effort to stem the rising tide of speculative shareholder lawsuits that have become particularly routine in connection with mergers and acquisitions.
According to the Wall Street Journal, 44% of M&As drew shareholder lawsuits in 2007, whereas as that figure more than doubled to 94% by 2013.  Such lawsuits typically end in a settlement, with shareholders receiving additional information and their scheming lawyers lining their pockets with company money.

In this case, the ATP, a professional tennis tour, was sued by tournament hosts in Germany because they were unhappy with their tournament being downgraded. But after the German plaintiffs lost their original suit, the ATP sued them in turn under the bylaw, seeking to recover its nearly $18 million in legal fees and costs.

If other corporations have or soon adopt similar loser pays bylaws, Delaware’s high court decision may ultimately be compared to a big forehand winner down the line, making shareholders and their lawyers think twice before rushing the net.

Sensible, fundamentally sound rulings such as this are what keep Delaware, by far, the state in which more Fortune 500 companies are incorporated than in any other.