Company Faces Investor Lawsuit Over Unique Bylaw on Shareholder Actions

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By Yin Wilczek

Jan. 30 — A specialty finance company in Florida that adopted a unique bylaw requiring shareholders, before they can sue the company, to obtain the written consent of other shareholders that hold at least 3 percent of the company's stock, now is facing a lawsuit over the bylaw.

Filed by Harry Rothenberg Jan. 20 in Florida's 15th Judicial Circuit Court, the complaint alleges that the “draconian bylaw” was adopted to insulate Imperial Holdings Inc.'s directors from “shareholder redress” for past and future state and federal law violations and fiduciary breaches.

“The Bylaw unilaterally overrides state and federal law and judicial precedent which expressly mandate the requirements that public shareholders must meet to commence and prosecute class or derivative actions,” the lawsuit states.

The case adds to the simmering controversy over companies' adoption of litigation reform bylaws, such as those providing for mandatory arbitration, forum selection and fee-shifting, which some have said will unfairly limit shareholder actions, but which defenders say merely protect companies and shareholders from frivolous lawsuits.

Unique to Goldstein Companies 

Commentators believe the bylaw at issue is unique to companies controlled by Phillip Goldstein and GWG Holdings Inc. Goldstein is Imperial's chairman and a principal of Bulldog Investors, the company's largest shareholder.

In a November press release announcing Imperial directors' adoption of the bylaw, Goldstein remarked on the “disturbing trend” of shareholders with small holdings suing companies purportedly on behalf of other shareholders or on behalf of the company.

“These lawsuits often result in other shareholders receiving no meaningful benefit and indirectly incurring the cost of the plaintiff's lawyer and the company's lawyer,” Goldstein said. “The Board believes it is in the best interest of the company to require a shareholder claiming to represent a class of shareholders or the company to demonstrate a minimum level of shareholder support.”

The bylaw will be submitted to shareholders for ratification at the company's annual meeting, Imperial said.

In his lawsuit, Rothenberg alleges that Imperial's bylaw is so onerous that it effectively guarantees that no class or derivative actions will ever be filed against the company or its officers and directors, “regardless of how egregious their conduct may be.”

‘Ultra Vires' Act 

“Plaintiff seeks a declaratory judgment in his favor, declaring that the Bylaw is an ultra vires act that was adopted in breach of the Individual Defendants’ fiduciary duties, is irreconcilable with Florida and federal law and public policy, and is invalid and unenforceable,” the lawsuit states.

Rothenberg also asks the court to impose preliminary and permanent injunctions barring Imperial and its board from enforcing the bylaw and from holding a shareholder vote on it “without full disclosure of all the communications with, and documents and information provided to or obtained by, the FBI, the” Securities and Exchange Commission and the Internal Revenue Service in connection with investigations that he said were ongoing.

An Imperial representative did not immediately respond to a request for comment.

Rothenberg's attorney—Stuart Davidson, Robbins Geller Rudman & Dowd LLP, Boca Raton, Fla.—told Bloomberg BNA Jan. 30 that the company and its board have been served with the lawsuit, but have not yet responded.

When asked whether other lawsuits are in the wings, Davidson said, “I would hope that when we prevail here, the boards of Goldstein’s other companies will see the error of their ways and rescind the illegal bylaws so that we wouldn’t have to initiate litigation.”

Generally Upheld 

Courts generally have upheld litigation reform bylaws. Even those most on the fringe—mandatory arbitration provisions that include class action waivers—have found acceptance in many courts. 

However, they are opposed by many investors and academics, who say adoption of the bylaws will lead to the decline of corporate accountability.

Fee-shifting bylaws have been particularly controversial following ATP Tour, Inc. v. Deutscher Tennis Bund, in which the Delaware Supreme Court concluded that such bylaws can be valid and enforceable. 

So far, 39 U.S. companies have adopted fee-shifting bylaws in the wake of ATP. The Delaware General Assembly is expected to act in May or June to possibly restrict the use of such bylaws, and there is an ongoing case in the Delaware Chancery Court challenging an enacted fee-shifting bylaw.

Lawrence Hamermesh, a law professor from Widener University in Wilmington, Del., told BBNA Jan. 30 that it is unlikely there will be many investor lawsuits challenging the adoption of litigation reform bylaws. There have been few of such challenges so far, and no Delaware court has refused to enforce the bylaw in question, he said. Given the lack of lawsuits, “it's not clear when,” or if, the Delaware courts “are going to speak on this subject.”

‘ATP' Decision 

“The problem is, when you get a decision like ATP, it’s very hard to know what the limits are on bylaws like these,” Hamermesh continued. He noted that the ATP court proceeded on the premise that a bylaw binds stockholders in the way that a contract is binding. The doctrine “is just not clear,” he said.

Other more effective avenues through which investors can try to discourage companies from proceeding with such bylaws is through legislation and working with the proxy advisory firms—Institutional Shareholder Services Inc. and Glass Lewis & Co. LLC—to pressure directors not to adopt the bylaws or to eliminate them, Hamermesh said.

Like other academics, Hamermesh added that without legislation, there likely will be a “deluge” of companies moving to adopt litigation reform bylaws.

To contact the reporter on this story: Yin Wilczek in Washington at

To contact the editor responsible for this story: Ryan Tuck at

The complaint is available at


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