Thursday, December 11, 2014

Law Suits Where Loser Pays : Delaware Politicians Attacking

Just think how much better outcomes are if everyone that is involved in a law suit has some skin in the game. Know this, those that believe they have been wronged by a corporation will have to calculate into their strategy the costs of losing the suit. That's fair, right? And isn't it all about what's fair these days?

But the politicians in Delaware believe this is not a good idea ass corporation should be open season for law suits not matter how unfounded. This proposal by the government leaves open the door for the question, what is the intended purpose of the proposal? Who and what is the ideology behind such a proposal?

I wonder what political party is in control of Delaware?  Just asking -

Delaware Proposal Threatens Loser-Pays Provisions
Source: Lisa A. Rickard, "Delaware Flirts With Encouraging Shareholder Lawsuits," Wall Street Journal, November 15, 2014.

December 1, 2014

There is a reason that new corporations choose to incorporate in Delaware: the state's law is very clear, consistent and business-friendly. Last year, 83 percent of new corporations were incorporated in Delaware.

But Lisa Rickard of the Wall Street Journal reports that things may change if a new legislative proposal passes. In Delaware, corporations often include provisions in their bylaws that allow the corporation to be reimbursed for litigation costs if plaintiffs bring a shareholder suit against the company and lose the case.

But some state lawmakers are trying to prevent businesses from including loser-pays provisions. Corporations are concerned, as the provisions allow companies to protect themselves from frivolous, and expensive, lawsuits. Lawsuits against corporations are hardly uncommon: since 2010, Rickard notes that over 90 percent of corporate mergers and acquisitions led to lawsuits. What sort of suits? Some involve investors that sue, claiming that the Board of Directors did not haggle for enough money or made other transactional errors. Others involve investors who insist their shares were undervalued -- these suits, explain Rickard, are especially troublesome for corporations who either have to pay the plaintiffs to settle the case or take the case to court and pay litigation costs, which can cost millions of dollars.

If the plaintiffs win, Delaware law also requires corporations to pay the investors 10 percent interest. The ability to recoup litigation costs, therefore, incentivizes corporations to litigate frivolous suits rather than settle them, while at the same time discouraging investors from filing illegitimate claims.
Moreover, the company's other (non-litigating) shareholders benefit from fee-shifting provisions, because any legal costs borne by the corporation are ultimately borne by shareholders.
 

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