Of Babies and Bathwater: Deterring Frivolous Stockholder Suits Without Closing the Courthouse Doors to Legitimate Claims
By: Mark Lebovitch & Jeroen van Kwawegen
The Delaware Supreme Court’s May 8, 2014 Opinion in ATP Tour, Inc. v. Deutscher Tennis Bund (“ATP”) marked a sudden and potentially transformative moment in the relationship among corporate boards, their stockholders, and the Delaware legal system. This Article observes that a failure to legislatively override the ATP precedent would likely have eliminated virtually all types of stockholder litigation. Notably, on June 24, 2015, Delaware Governor Jack Markell signed into law the Delaware General Assembly’s amendment to the DGCL that legislatively overruled ATP, to the extent it would apply to public companies. The General Assembly’s amendment, codified at Section 102(f), is generally consistent with the core conclusion of this Article, which was largely written before the Corporation Law Council first proposed what became DGCL Sections 102(f), 109(b), and 114(b). The authors submit, however, that in light of the continued efforts by the U.S. Chamber of Commerce and others to undermine and eliminate core stockholder protections, as well as certain judicial rulings that attempted to broadly grapple with a narrow problem, the passage of the amendment cannot be the last word on the topic. Indeed, while Delaware has recently adopted variants of the proposals advocated in this Article for ways to fight the problem of “disclosure-only” settlements, other states continue to flirt with empowering directors to eliminate liability altogether, including through fee-shifting provisions. The Article asserts that the “nuclear option” of allowing boards of public companies to employ fee-shifting bylaws against stockholders whose interests they are supposed to represent is poor policy and departs from well-established legal principles. Moreover, such a draconian use of corporate power is not needed to curtail the problem of frivolous lawsuits that achieve no material benefit for stockholders while providing corporate defendants with broad releases. In opposing feeshifting bylaws, the authors provide legal and policy reasons not to permit bylaws or charter provisions to impede fundamental stockholder rights, including the right to enforce fiduciary duties through litigation. After detailing the reasons to reject the enforcement of fee shifting bylaws, the authors propose an alternative to fee shifting to reduce the number of cases that provide no material benefit to stockholders and put a strain on corporations and the judiciary. Expanding upon the logic 492 DELAWARE JOURNAL OF CORPORATE LAW VOL. 40 that underlies then-Chancellor Strine’s rejection of a settlement in the Medicis litigation, the authors propose a two-part test that would eliminate the weakest two-thirds of all stockholder litigation. Under the authors’ proposed test, before “disclosure-only settlements” are approved, the Court would affirmatively determine that: (1) the disclosures providing the purported consideration to stockholders are, in fact, material, and (2) subject to judicial discretion to approve a broader release for good cause shown, the release is limited to the benefit of the disclosures obtained, so as to ensure that meritorious claims that were not properly vetted by counsel are not inadvertently or thoughtlessly released. While corporate actors would lose their access to overbroad litigation releases, they could still obtain protection from future suit for conduct that was genuinely vetted through the litigation process. Most important, by applying the above-proposed rule, the number of frivolous suits will decrease, the increasingly hostile criticism of stockholder litigation in the merger context will lose its basis, the societal burden posed by meritless suits will be curtailed, and core stockholder rights and the societal benefit of meaningful stockholder litigation will be preserved. The authors note—and discuss in the Epilogue – that the Court of Chancery’s recent ruling in In re Trulia Inc., Stockholder Litigation broadly marks a departure from the prior practice of routinely approving “disclosure-only” settlements and adopts numerous of the concepts set forth below.