Ghada Amer, “Le Champ de Marghuerites” (2011)
Module VII – Fiduciary Duties
Chapter 17
Shareholder Litigation
• Derivative vs. direct actions • Special litigation committee
Bar
exam
Corporate
practice
Law
profession
Citizen of
world
– Judicial review: BJR or
– Derivative action: 2 suits in
more?
1- enforce fiduciary duties
to corporation
– MBCA: universal demand
+ board dismissal
– Direct action: representative
suit - protect Sh rights
• Plaintiff standing
– Distinction between two:
– Adequacy
who recovers?
– Contemporaneous
• Demand requirement
ownership
– Board decides lawsuit’s
• Policy issues
merits
– Who guards the guards?
– Aronson test: (1) director
– Challenge of settlements
disinterest + independence,
– Nature of attorneys’ fees
(2) decision protected by
BJR
Corporations:
A Contemporary Approach
Chapter 17
Shareholder Litigation
Slide 2
of 17
1.
Fundamentals
–
–
2.
Corporations and policy
–
–
–
3.
Chapter 17
Shareholder Litigation
Sale of control
Antitakeover devices
Deal protection
Close corporations
–
–
Corporations:
A Contemporary Approach
Securities markets
Planning
Securities fraud class actions
Oppression
Insider trading
Corporate deals
–
–
–
10.
Shareholder litigation
Board decision making
Board oversight
Director conflicts
Executive compensation
Corporate groups
Stock corporations
trading
Close
–
–
–
9.
Shareholder voting
Shareholder information rights
Public shareholder activism
Fiduciary duties
–
–
–
–
–
–
8.
10.
Piercing corporate veil
Corporate environmental liability
Corporate criminal liability
Corporate governance
–
–
–
7.
Numeracy for corporate lawyers
Capital structure
Corporate externalities
–
–
–
6.
Organizational choices
Incorporation
Locating corporate authority
Corporate finance
–
–
5.
Corporate federalism
Corporate social responsibility
Corporate political action
Corporate form
–
–
–
4.
Introduction to firm
Corporate basics
Planning
Oppression
Slide 3
of 25
Shareholder self-protection
• Vote
– Approve fundamental transactions
– Elect directors (annually, special
meetings)
– Remove directors / fill vacancies
– Initiate action (amend bylaws, adopt
resolutions)
• Sue
– Enforce fiduciary duties (derivative
suits)
– Protect rights (disclosure, voting,
appraisal, inspection)
Prof. Robert Thompson
• Sell
– Liquidity (except insider trading)
– Takeovers (tender offer)
Corporations:
A Contemporary Approach
Chapter 17
Shareholder Litigation
Slide 4
of 17
Enforcement of
fiduciary duties …
Corporations:
A Contemporary Approach
Chapter 17
Shareholder Litigation
Slide 5
of 17
Derivative suit
(enforce duties to corporation)
Delaware Supreme Court:
“if an action is derivative, the plaintiffs are then required
Shareholder
to comply with the
requirements of Court of Chancery
Corporation
Fiduciaries
(lawyer) Rule 23.1, that the stockholder:
(a) retain ownership of the shares throughout the
litigation;
“on (b)
behalf
of demand on the board;
violation
of
make pre-suit
and
corporation”
corporate duties
(recovery Further,
to corporation)
(c) obtain court approval of any settlement.
the recovery, if any, flows only to the corporation.”
Corporations:
A Contemporary Approach
Chapter 17
Shareholder Litigation
Slide 6
of 17
Class action
(enforce duties to shareholders)
Sh rep
(lawyer)
Shareholder
class
violation of
direct duties
“on behalf
of class”
Insiders
(recovery to shareholders)
Corporation
Corporations:
A Contemporary Approach
Chapter 17
Shareholder Litigation
Slide 7
of 17
How distinguish …
Corporations:
A Contemporary Approach
Chapter 17
Shareholder Litigation
Slide 8
of 17
Tooley v. Donaldson, Lufkin & Jenrette
(Del. 2004)
CS agrees to buy DLJ - through
a $90 tender offer.
Minority
shareholders
CS exercises its rights to delay
the tender offer by 22 days,
which the DLJ board accepts.
Tooley (and his law firm) claim
the board violated duties to
the public DLJ shareholders.
Plaintiff
shareholder
Credit Suisse
(new 71% SH)
Why was lawsuit brought as
class action?
Board
DLJ
Why is this not a derivative
action?
Corporations:
A Contemporary Approach
Chapter 17
Shareholder Litigation
Slide 9
of 17
Delaware Supreme Court:
.. in determining whether a
stockholder's claim is derivative
or direct … That issue must turn
solely on the following questions:
(1) who suffered the alleged harm
(the corporation [derivative] or
the suing stockholders,
individually [direct]); and
(2) who would receive the benefit of
any recovery or other remedy
(the corporation [derivative] or
the stockholders, individually
[direct])?
Chief Justice Norm Veasey
Tooley v. Donaldson, Lufkin & Jenrette
(Del. 2004)
Corporations:
A Contemporary Approach
Chapter 17
Shareholder Litigation
Slide 10
of 17
ALI Principles
A derivative action …
(1) Creates recovery goes to the
corporation [class action recovery
shared by all shareholders in
class]
(2) Has preclusive effect that spares
corporation and defendants
multiplicity of actions
(3) Entitles successful plaintiff to an
award of attorneys' fees from
corporation [class action, from the
fund]
(4) Allows board to take over the
action or to seek dismissal
Corporations:
A Contemporary Approach
Chapter 17
Shareholder Litigation
Slide 11
of 17
Hypos
1.
Board issues new stock, but denies preemptive rights to
existing shareholders. Sh sues.
2.
Parent corporation refuses to allocate business
opportunities to partially-owned sub. Sh of sub sues
parent.
3.
Board grants CEO a lifetime employment contract. Sh
sues.
Corporations:
A Contemporary Approach
Chapter 17
Shareholder Litigation
Slide 12
of 17
Demand requirement …
Corporations:
A Contemporary Approach
Chapter 17
Shareholder Litigation
Slide 13
of 17
FRCP 23.1. Derivative Actions
(a) Prerequisites. This rule applies when one or more shareholders … bring a
derivative action to enforce a right that the corporation may properly
assert but has failed to enforce. The derivative action may not be
maintained if it appears that the plaintiff does not fairly and adequately
represent the interests of shareholders who are similarly situated in
enforcing the right of the corporation or association.
(b) Pleading Requirements. The complaint must be verified and must:
(1)
(2)
(3)
allege that the plaintiff was a shareholder or member at the time of the
transaction complained of, or that the plaintiff's share or membership later
devolved on it by operation of law;
allege that the action is not a collusive one to confer jurisdiction that the court
would otherwise lack; and
state with particularity: (A) any effort by the plaintiff to obtain the desired
action from the directors or comparable authority and, if necessary, from the
shareholders or members; and (B) the reasons for not obtaining the action or
not making the effort.
(c) Settlement, Dismissal, and Compromise. A derivative action may be
settled, voluntarily dismissed, or compromised only with the court's
approval. Notice of a proposed settlement, voluntary dismissal, or
compromise must be given to shareholders or members in the manner
that the court orders.
Corporations:
A Contemporary Approach
Chapter 17
Shareholder Litigation
Slide 14
of 17
Aronson v. Lewis
(Del. 1984)
Meyers Parking gives its CEO (and
47% shareholder) a sweetheart
employment and retirement
package.
Shareholders
Plaintiff
shareholder
Shareholder Lewis (a serial plaintiff)
claims this is waste. Why is this
a derivative suit?
Who controls the corporation’s
litigation decisions. Why doesn’t
Lewis ask the board to sue?
Corporation
Asking the board to sue all the
directors is futile - no? Who
dominates the board?
Where does the court start its
analysis? Why the BJR?
Corporations:
A Contemporary Approach
Board
Directors
Chapter 17
Shareholder Litigation
Slide 15
of 17
Our view is that in determining demand
futility the Court of Chancery in the
proper exercise of its discretion must
decide whether, under the
particularized facts alleged, a
reasonable doubt is created that:
(1) the directors are disinterested
and independent and
(2) the challenged transaction was
otherwise the product of a valid
exercise of business judgment.
Hence, the Court of Chancery must make
two inquiries, one into the
independence and disinterestedness of
the directors and the other into the
substantive nature of the challenged
transaction and the board's approval
thereof.
Corporations:
A Contemporary Approach
Chapter 17
Shareholder Litigation
Slide 16
of 17
Quick quiz (Delaware law)
1.
True or False. Fink “dominated” the directors since he owned
47% of the company’s stock and chose them to the board.
2.
True or False. Shareholders can avoid making a demand on the
board by suing all the directors, who become necessarily
“interested” in the lawsuit.
3.
True or False. Fink’s deal (where it was unlikely the corporation
would receive any services) is a “waste of corporate assets” nobody would say corporation got its money’s worth.
4.
True or False. Despite academic claims of board “structural
bias,” boards regularly decide to sue their own members.
5.
True or False. Whether a lawsuit has merit is something judges
know better than directors - no reason for BJR abstention.
Corporations:
A Contemporary Approach
Chapter 17
Shareholder Litigation
Slide 17
of 17
Board dismissal ….
Use of “special litigation committee”
Corporations:
A Contemporary Approach
Chapter 17
Shareholder Litigation
Slide 18
of 17
Derivative suit
(board request for dismissal)
Delaware Supreme Court:
[When confronted with a request for
dismissal from an SLC] first, the
court should inquire into the
independence and good faith of the
Shareholder
committee and the basesCorporation
(lawyer)
supporting its conclusions. …. The
second step provides a balance of
corporate and shareholder
interests … the Court should
determine applying own
“on behalf
ofjudgment
independent
business
whether to dismiss.”
Board
(SLC)
Directors
violation of
corporate duties
corporation”
(recovery to corporation)
Corporations:
A Contemporary Approach
Chapter 17
Shareholder Litigation
Slide 19
of 17
MBCA (demand in derivative litigation)
§ 7.42 Demand
No shareholder may commence a derivative proceeding until:
(1) a written demand has been made upon the corporation to take suitable action; and
(2) 90 days have expired from the date the demand was made unless … the demand has
been rejected by the corporation or unless irreparable injury to the corporation would
result by waiting ….
§ 7.44 Dismissal
(a) A derivative proceeding shall be dismissed by the court on motion by the corporation if
one of the groups specified in subsection (b) … has determined in good faith after
conducting a reasonable inquiry upon which its conclusions are based that the
maintenance of the derivative proceeding is not in the best interests of the corporation.
(b) … the determination in subsection (a) shall be made by: (1) a majority vote of
independent directors present at a meeting of the board of directors if the independent
directors constitute a quorum; or (2) a majority vote of a committee consisting of two or
more independent directors appointed by majority vote of independent directors present
at a meeting of the board of directors, whether or not such independent directors
constituted a quorum.
(c) None of the following shall by itself cause a director to be considered not independent
for purposes of this section:
(1) the nomination or election of the director by persons who are defendants in
the derivative proceeding or against whom action is demanded;
(2) the naming of the director as a defendant in the derivative proceeding or as a
person against whom action is demanded; or
(3) the approval by the director of the act being challenged in the derivative
proceeding or demand if the act resulted in no personal benefit to the director.
Corporations:
A Contemporary Approach
Chapter 17
Shareholder Litigation
Slide 20
of 17
Derivative suit
(board request for dismissal)
Wisconsin Supreme Court:
Board
(SLC)
Independence depends on:
1. Whether named as defendant
2. Whether approved challenged
transaction
Shareholder
Directors
3. Whether have financial dealings
with
Corporation
(lawyer)
corporation
4. Whether have non-financial
relationships with insiders
5. Whether acts as consultant, counsel
6. Whether small SLC (less group think)
“on behalf of
violation of
7. Whether SLC is well advised by banker,
lawyercorporation”
corporate duties
(recovery to corporation)
Corporations:
A Contemporary Approach
Chapter 17
Shareholder Litigation
Slide 21
of 17
Delaware
MBCA
SLC
SLC
Board
Shareholder
Board
Move to
dismiss
Shareholder
Court
Corporations:
A Contemporary Approach
Move to
dismiss
Court
Chapter 17
Shareholder Litigation
Slide 22
of 17
1. Which of the following should be a
derivative suit?
a. Board enters into merger,
without necessary Sh approval
b. Board has Corp buy majority
Sh’s art collection
c. Board gives CEO “complete
control” over corporation
2. Delaware requires Shs make
demand on board …
a. Always
b. when time is of essence
c. Unless excused as futile
3. Delaware excuses demand …
a. When current board majority is
financially interested
b. When majority of current board
not independent
c. When BJR does not apply
Answers:
Corporations:
A Contemporary Approach
4. In Aronson v. Lewis …
a. Directors dominated because CEO
was 47% Sh
b. Directors interested because all
directors were sued
c. Demand was not excused
5. After Aronson v. Lewis a Sh (pre-suit)
must have particularized facts that …
a. Old board was personally tied to
interested director
b. Majority of current directors
financially interested in transaction
c. All directors interested/dominated
6. In Delaware, a Sh who makes demand
on board …
a. Concedes board is disinterested
and independent
b. Can still sue and show board
interested and non-independent
c. Can sue after waiting for 90 days
for board to act
Chapter 29
Planning in CHC
Slide 23
of 59
The end
Corporations:
A Contemporary Approach
Chapter 17
Shareholder Litigation
Slide 24
of 17
Module VII – Fiduciary Duties
Chapter 17
Shareholder Litigation
• Derivative vs. direct actions
Bar
exam
Corporate
practice
Law
profession
Citizen of
world
Corporations:
A Contemporary Approach
– Derivative action: 2 suits in 1- enforce
fiduciary duties to corporation
– Direct action: representative suit - protect
Sh rights
– Distinction between two: who recovers?
• Demand requirement
– Board decides lawsuit’s merits
– Aronson test: (1) director disinterest +
independence, (2) decision protected by
BJR
Chapter 17
Shareholder Litigation
Slide 25
of 17
1.
Fundamentals
–
–
2.
Corporations and policy
–
–
–
3.
Chapter 17
Shareholder Litigation
Sale of control
Antitakeover devices
Deal protection
Close corporations
–
–
Corporations:
A Contemporary Approach
Securities markets
Planning
Securities fraud class actions
Oppression
Insider trading
Corporate deals
–
–
–
10.
Shareholder litigation
Board decision making
Board oversight
Director conflicts
Executive compensation
Corporate groups
Stock corporations
trading
Close
–
–
–
9.
Shareholder voting
Shareholder information rights
Public shareholder activism
Fiduciary duties
–
–
–
–
–
–
8.
10.
Piercing corporate veil
Corporate environmental liability
Corporate criminal liability
Corporate governance
–
–
–
7.
Numeracy for corporate lawyers
Capital structure
Corporate externalities
–
–
–
6.
Organizational choices
Incorporation
Locating corporate authority
Corporate finance
–
–
5.
Corporate federalism
Corporate social responsibility
Corporate political action
Corporate form
–
–
–
4.
Introduction to firm
Corporate basics
Planning
Oppression
Slide 26
of 25
Enforcement of
fiduciary duties …
Corporations:
A Contemporary Approach
Chapter 17
Shareholder Litigation
Slide 27
of 17
Derivative suit
(enforce duties to corporation)
Delaware Supreme Court:
“if an action is derivative, the plaintiffs are then required
Shareholder
to comply with the
requirements of Court of Chancery
Corporation
Fiduciaries
(lawyer) Rule 23.1, that the stockholder:
(a) retain ownership of the shares throughout the
litigation;
“on (b)
behalf
of demand on the board;
violation
of
make pre-suit
and
corporation”
corporate duties
(recovery Further,
to corporation)
(c) obtain court approval of any settlement.
the recovery, if any, flows only to the corporation.”
Corporations:
A Contemporary Approach
Chapter 17
Shareholder Litigation
Slide 28
of 17
Class action
(enforce duties to shareholders)
Sh rep
(lawyer)
Shareholder
class
violation of
direct duties
“on behalf
of class”
Insiders
(recovery to shareholders)
Corporation
Corporations:
A Contemporary Approach
Chapter 17
Shareholder Litigation
Slide 29
of 17
Demand requirement …
[in Delaware]
Corporations:
A Contemporary Approach
Chapter 17
Shareholder Litigation
Slide 30
of 17
Aronson v. Lewis
(Del. 1984)
Meyers Parking gives its CEO (and 47%
shareholder) a sweetheart employment
and retirement package.
Shareholders
Plaintiff
shareholder
Sh Lewis (a serial plaintiff – really a
plaintiff’s law firm) claims this is waste.
Why is this a derivative suit?
Who controls the corporation’s litigation
decisions. Why doesn’t plaintiff ask
the board to sue?
Board
Corporation
Asking the board to sue all the directors is
futile - no? Who dominates the board?
Where does the court start its analysis?
Why the BJR?
Directors
Corporations:
A Contemporary Approach
Chapter 17
Shareholder Litigation
Slide 31
of 17
Our view is that in determining demand
futility the Court of Chancery in the
proper exercise of its discretion must
decide whether, under the particularized
facts alleged, a reasonable doubt is
created that:
(1) the directors are disinterested and
independent and
(2) the challenged transaction was
otherwise the product of a valid
exercise of business judgment.
Hence, the Court of Chancery must make
two inquiries, one into the
independence and disinterestedness of
the directors and the other into the
substantive nature of the challenged
transaction and the board's approval
thereof.
Corporations:
A Contemporary Approach
Chapter 17
Shareholder Litigation
Slide 32
of 17
1. Which of the following should
be a derivative suit?
a. Board issues new stock,
without preemptive rights
b. Board has Corp buy
majority Sh’s art collection
c. Board gives lifetime
employment to CEO
2. Delaware requires Shs make
demand on board …
a. Always
b. when time is of essence
c. Unless excused as futile
3. Delaware excuses demand …
a. When current board
majority $$ interested
b. When current board not
independent
c. When BJR not apply
4. In Aronson v. Lewis …
a. Directors dominated because
CEO was 47% Sh
b. Directors interested because all
directors were sued
c. Demand was not excused
5. After Aronson v. Lewis a Sh must
have particularized facts that …
a. Current directors personally tied
to interested director
b. Current directors financially
interested in challenged tx
c. All directors interested/dominated
6. In Delaware, a Sh who makes
demand on board …
a. Concedes board is disinterested
and independent
b. Can still sue and show board
interested and non-independent
c. Can sue after waiting for 90 days
for board to act
Answers: 1-b (c – either deriv, direct) / 2-c / 3-abc / 4-c / 5-b / 6-a
Corporations:
A Contemporary Approach
Chapter 29
Planning in CHC
Slide 33
of 59
Universal demand
and board dismissal ….
[under MBCA]
Corporations:
A Contemporary Approach
Chapter 17
Shareholder Litigation
Slide 34
of 17
MBCA (demand in derivative litigation)
§ 7.42 Demand
No shareholder may commence a derivative proceeding until:
(1) a written demand has been made upon the corporation to take suitable action; and
(2) 90 days have expired from the date the demand was made unless … the demand has been
rejected by the corporation or unless irreparable injury to the corporation would result by
waiting ….
§ 7.44 Dismissal
(a) A derivative proceeding shall be dismissed by the court on motion by the corporation if one of the
groups specified in subsection (b) … has determined in good faith after conducting a reasonable
inquiry upon which its conclusions are based that the maintenance of the derivative proceeding is
not in the best interests of the corporation.
(b) … the determination in subsection (a) shall be made by: (1) a majority vote of independent
directors present at a meeting of the board of directors if the independent directors constitute a
quorum; or (2) a majority vote of a committee consisting of two or more independent directors
appointed by majority vote of independent directors present at a meeting of the board of directors,
whether or not such independent directors constituted a quorum.
(c) None of the following shall by itself cause a director to be considered not independent for
purposes of this section:
(1) the nomination or election of the director by persons who are defendants in the derivative
proceeding or against whom action is demanded;
(2) the naming of the director as a defendant in the derivative proceeding or as a person
against whom action is demanded; or
(3) the approval by the director of the act being challenged in the derivative proceeding or
demand if the act resulted in no personal benefit to the director.
Corporations:
A Contemporary Approach
Chapter 17
Shareholder Litigation
Slide 35
of 17
1. Which of the following should be a
derivative suit?
a. Board misleads Shs about
impending merger
b. Board has Corp buy CEO’s
wife’s art collection
c. Board announces revised
dividend policy
4. Under MBCA, derivative suit must be
dismissed if in good faith and after
reasonable inquiry …
a. Ds constituting board quorum ask
b. Special litigation committee (properly
chosen/composed) asks
c. Demand was not excused
5. Under MBCA, Ds aren’t independent …
a. If they have personal ties to
interested director
b. If they have financial interest in
challenged tx
c. If they have been sue
2. MBCA requires Shs make
demand on board …
a. Always (except emergency)
b. When time is of essence
c. Unless excused as futile
3. MBCA requires dismissal of
derivative suit …
a. When current board asks
b. When majority of independent,
disinterested Ds ask
c. When Sh makes demand
6. In MBCA, Sh making board demand …
a. Concedes board is disinterested and
independent
b. Can still sue to show current Ds
interested and non-independent
c. Can sue after waiting for 90 days for
board to act
Answers:
Corporations:
A Contemporary Approach
Chapter 29
Planning in CHC
Slide 36
of 59
The end
[of short Ch 17]
Corporations:
A Contemporary Approach
Chapter 17
Shareholder Litigation
Slide 37
of 17
Corporations
(shareholder checklist)
•
•
•
•
•
Structure of corporation
Financial rights
Corporate externalities (limited liability)
Corporate governance
Fiduciary duties (directors, controlling Shs)
–
–
–
–
–
–
Shareholder litigation
Board decision making
Board oversight
Director self dealing (conflicts)
Executive compensation
Duties within corporate groups
• Liquidity rights
– Stock trading
– Corporate deals
• Close corporation
Corporations:
A Contemporary Approach
Chapter 17
Shareholder Litigation
Slide 38
of 17
"Delaware’s Balancing Act"
JOHN ARMOUR, University of Oxford - Faculty of Law, Oxford-Man Institute of
Quantitative Finance, European Corporate Governance Institute (ECGI)
BERNARD S. BLACK, Northwestern University - School of Law, Northwestern
University - Kellogg School of Management, European Corporate Governance
Institute (ECGI)
BRIAN R. CHEFFINS, University of Cambridge - Faculty of Law, European Corporate
Governance Institute (ECGI)
Delaware’s courts and well-developed case law are widely seen as integral elements
of Delaware’s success in the competition among states for incorporations. Today,
however, Delaware’s popularity as a venue for corporate litigation is under threat.
Increasingly, as the empirical evidence summarized in this paper shows, corporate
cases involving Delaware-incorporated companies are being brought and decided
elsewhere. This paper examines the implications of this “out-of-Delaware” trend,
emphasizing in so doing a difficult balancing act that the Delaware courts face. If
Delaware accommodates litigation too readily, plaintiffs’ attorneys will file a plethora
of “weak” cases and companies, fearful of lawsuits, may begin to incorporate
elsewhere. On the other hand, if plaintiffs’ attorneys believe the Delaware judiciary is
unwelcoming, they will tend to file cases in other courts. Delaware could then lose its
status as the de facto national corporate law court and may no longer offer the rich
body of up-to-date case law precedent upon which “users” of Delaware corporate law
depend. Delaware’s overall corporate law “brand” could in turn become less valuable,
thus jeopardizing its pre-eminence in the competition for incorporations.
Group Hypo
Your group is the Council of the Section of Corporation Law of the State of Delaware. As such, you are responsile for
formulating and recommending to the Delaware General Assembly amendments to the Delaware General Corporation
Law.
the Recently, as shareholder litigation has become a fixture of mergers and acquisitions (M&A) practice, some
corporations have experimented with putting fee-shifting provisions in the corporate bylaws. The purpose has been to
discourage groundless shareholder claims, particularly in M&A transactions where more than 90 percent of such
transactions are challenged, often by multiple shareholders. See §39.2.3. Are such bylaws valid, when unilaterally
created by corporate boards without shareholder approval? In 2014, the Delaware Supreme Court addressed the
enforceability of a board-passed, fee-shifting bylaw. ATP Tour, Inc. v. Deutscher Tennis Bund (German Tennis
Federation), 91 A.3d 554 (Del. 2014) (en banc). The case, brought by a member of the Association of Tennis
Professionals Tour, challenged a board-passed bylaw amendment that provided any member that brought an
intracorporate claim and failed to obtain “a judgment on the merits that substantially achieves the remedy sought”
could be compelled to reimburse the ATP Tour for its defense costs.
The court ruled that the ATP bylaw was facially valid, given that it dealt with an intracorporate matter – a proper subject for
the bylaws. The court explained, however, that a facially-valid bylaw might be invalid if it had an improper purpose,
though the court pointed out that deterring litigation was not an improper purpose. The court said that corporations
could create a fee-shifting bylaw “midstream” even against members who had joined the corporation before the
bylaw’s adoption.
The ATP decision -- though involving a not-for-profit, non-stock corporation -- has potentially far-reaching implications for
for-profit corporations. If used by corporate boards to discourage – if not squelch – shareholder litigation in M&A
transactions, it could lead to such litigation being brought by shareholders as “packaged settlements” in which
management would be asked to enter into a settlement agreement without actual litigation. It could lead to
shareholder activists proposing their own bylaw amendments to either rescind or prevent board-passed, fee-shifting
bylaws. See §7.1.4. It could lead to retaliatory “just say no” votes against directors who had approved such bylaws.
And, as has happened in Delaware, it could lead to state legislative proposals that would preclude boards from
unilaterally creating fee-shifting bylaws. Time will tell.
Corporations:
A Contemporary Approach
Chapter 14
Shareholder Voting Rights
Slide 40
of 59