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Aug. 24 — Delaware courts and corporate defendants may now find it easier to have frivolous lawsuits dismissed at an early stage, according to a recent academic paper.
Lawrence A. Hamermesh, a law professor from Widener University, and Michael L. Wachter, a law professor from the University of Pennsylvania, suggest in a working paper that “active judicial supervision” during the early stages of litigation provides a better solution to addressing the “ubiquitous litigation” that arises from corporate transactions than fee-shifting bylaw and charter provisions.
The paper notes that no system is perfect and that Delaware's “pleading triage system” will not entirely eliminate the “merger tax” problem in which mergers and acquisitions are routinely challenged through shareholder litigation. However, the authors propose that with the increased use of Delaware forum selection provisions, “the motion to dismiss and the motion to expedite discovery are likely to become even more important in promoting the efficient conduct of shareholder class and derivative litigation involving public companies.”
“Mostly, the paper was designed to show how the system works and can work, and why it works the way it does,” Hamermesh told Bloomberg BNA. The system can deal with the very big problem that litigation is expensive once it gets to comprehensive discovery, he said, adding that there are mechanisms that try to separate good cases from bad ones at an early stage.
The system the paper describes works a bit more effectively if a corporation has an exclusive forum provision, Hamermesh continued. “Defendants will be a little braver” about challenging cases they think are frivolous and courts are going to be “better equipped” to do the policing the paper describes.
“I don’t think settlements will go away and I don’t think a lot of defendants want them to,” he said. But I think the system we describe—the triage system—works a lot better “when you don’t have jurisdictional competition” because it just undermines the dynamics of the litigation process.
Earlier this summer, Delaware Gov. Jack Markell (D) signed legislation that, among other actions, restricts the ability of stock corporations to adopt “loser pays” bylaws or charter provisions and endorses Delaware exclusive forum selection clauses.
The push to restrict fee-shifting bylaws was provoked by concerns that such provisions would effectively preclude shareholders from bringing derivative litigation. However, the legislation faced strong opposition. Critics argued that the legislation eliminated an important mechanism that corporations can use to combat abusive ligation, particularly in the M&A context.
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The working paper is available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2646861
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