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By Michael Greene
Nov. 5 — Sen. Richard Blumenthal (D-Conn.) has asked the Securities and Exchange Commission to take action regarding fee-shifting bylaws that allow corporations to recover litigation expenses from investors that unsuccessfully file derivative lawsuits against them.
In an Oct. 29 letter sent to SEC Chairman Mary Jo White, Blumenthal criticized unilaterally adopted bylaws that allow corporations to “effectively immunize themselves from the possibility of shareholder lawsuits.”
He called on the commission to “protect investors and America's capital markets” from what he perceives as a “serious and imminent threat.”
“[O]ne of the key checks on corporate malfeasance—private citizen suits—may soon become an empty threat,” he wrote.
Responding to a certified question in May in ATP Tour Inc. v. Deutscher Tennis Bund, the Delaware Supreme Court found that fee-shifting provisions in the bylaws of a Delaware non-stock corporation can be enforceable.
In the aftermath of this decision, both plaintiffs' firms and academics have raised concerns regarding the impact of such bylaws. Experts have estimated that at least 24 companies have adopted one-way bylaws). A legal challenge to one such bylaw is ongoing in the Delaware Chancery Court, and the Delaware General Assembly is scheduled to take up a bill in January that would prohibit all “loser pays” bylaws.
Blumenthal's letter provided some harsh criticism of ATP Tour.
“[T]he Delaware court found no problem with corporate executives unilaterally changing the rules that will govern any lawsuit against them, even if their clear goal is to stop shareholders from holding them legally accountable,” he wrote.
“The potential ramifications from this decision are immense,” he continued. “No rational investor, even with significant financial interests at stake and when presented with clear evidence of corporate misconduct, will brave litigation when the corporate defendant can force the investor to face financial ruin unless he substantially wins on every point.”
The active Delaware lawsuit has attacked the bylaw at issue on the grounds of its potential breadth.
Blumenthal also mentioned that ATP Tour is beginning to have a ripple effect in other jurisdictions as well.
Recently, the Oklahoma legislature adopted a bill, which goes into effect Nov. 1, that mandates fee-shifting in derivative lawsuits.
To contact the reporter on this story: Michael Greene in Washington at firstname.lastname@example.org
To contact the editor responsible for this story: Ryan Tuck at email@example.com
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