Monthly Archives: June 2015

“No Pay” Provisions: The Forgotten Middle Ground In The Fee-Shifting Battle

A. Thompson Bayliss is a partner at Abrams & Bayliss LLP. This post is based on a Abrams & Bayliss publication by Mr. Bayliss and Mark H. Mixon, Jr. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

If it becomes law, Delaware State Senate Bill 75 will prohibit Delaware stock corporations from adopting provisions in their bylaws or certificates of incorporation that would shift legal fees to the losing party in stockholder litigation. [1] The debate over these so-called “loser pays” provisions and the proposed legislation prohibiting them has generated controversy nationwide. Opponents of the legislation argue that abusive lawsuits impose a “merger tax” and that prohibiting “loser pays” provisions would “eliminate an important mechanism” that could “protect innocent shareholders against the costs of abusive litigation.” [2] Proponents of the legislation contend that “loser pays” provisions would “foreclose meritorious stockholder claims [and] render illusory the fiduciary obligations of corporate directors.” [3] Both sides of the public debate have overlooked the availability of “no pay” provisions, which could transform stockholder litigation without the effects that make “loser pays” provisions unpalatable to many. [4]


Institutional Investing When Shareholders Are Not Supreme

Anne Tucker is Associate Professor of Law at Georgia State University College of Law. This post is based on an article that first appeared in the Harvard Business Law Review, authored by Professor Tucker, and Christopher Geczy, Jessica Jeffers and David Musto, all of the Department of Finance at the University of Pennsylvania.

Signs of the public’s appetite for alternative business forms, such as benefit corporations, [1] that blend profit with purpose include the success of get-one-give-one brands like Warby Parker, and Etsy’s recent $300 million IPO, which made it the second (and largest) B Corp to go public. The success of alternative business forms will also depend, in part, on acceptance by institutional investors, as companies would likely suffer without access to their trillions in assets under management.

The question of institutions’ attitudes toward investing in alternative business forms prompted our recent research, Institutional Investing When Shareholders Are Not Supreme. [2] We address the question by gauging institutional investors’ response to decreased pressure on public firms to maximize shareholder value caused by the passage of constituency statutes. Why constituency statutes? Constituency statutes, first passed as takeover defenses in the 1980’s, explicitly extended directors’ discretion to consider non-shareholder interests in takeover, and sometimes other, circumstances. [3] The changes imposed by constituency statutes were smaller in scope (permissive director discretion in limited circumstances) than the changes codified in benefit corporation legislation (mandatory director consideration of a broader range of circumstances), but constituency statutes were the first codification of directors’ ability to reject a potentially profit maximizing endeavor because of other, non-shareholder concerns. [4] We didn’t rely solely on the statutory language to demonstrate that constituency statutes constituted a legal change; we analyzed thirty years’ worth of case citations to conclude that the statutes, as enforced, expanded boards’ rights to serve nonshareholder interests as opposed to maintaining the status quo. [5] Constituency statutes, at the time of their initial passage, sparked a large body of corporate legal scholarship theorizing the impact (and legality) of reducing pressure to maximize shareholder value. [6] We reviewed this initial debate in our paper because it mirrors, in many respects, the rhetoric and theory evoked in today’s alternative business form debate.


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