Hundreds of public companies have adopted bylaws over the past two years requiring shareholders suing them to do so in a single court — an effort, advisers say, to impose some order on what had become a litigation feeding frenzy.
It seems to be working.
A new study finds that while shareholders still sue over virtually every corporate transaction — 96% for mergers over $1 billion in 2014, unchanged from prior years —- they’re doing it in fewer courts. Just 40% of deals faced suits in more than one jurisdiction, down from 62% in 2013, according to Cornerstone Research. The number of individual complaints filed per deal also fell to 4.5, its lowest level since 2008.
These lawsuits, which typically accuse boards of selling too cheaply or failing to look out for shareholders’ best interests, are divisive. Critics including corporate lawyers, executives and the occasional judge, say they constitute a “deal tax” and often fail to uncover any wrongdoing. Defenders say they keep boards on their best behavior and, in egregious cases, can recover money for investors — and indeed, the plaintiffs’ bar has scored a few big wins lately.
Multi-jurisdictional litigation has been a particular gripe of corporate advisers. Responding to lawsuits in multiple courts around the country raises defense costs and encourages bad settlements that do little for shareholders while enriching plaintiffs’ lawyers, they say.
In 2013, a few large companies including Chevron Corp.CVX +0.57% and FedEx Corp.FDX -1.23% tested the waters with a new bylaw that would establish the Delaware Court of Chancery as the exclusive forum for shareholder disputes. Investors surf, and the bylaw was upheld and quickly popularized. Nearly 1,000 companies have since adopted one, securities filings show. Most choose Delaware, though a few have gone elsewhere with success.
Which brings us to Cornerstone’s latest findings: “This decline in the number of courts is likely the result of the widespread adoption of corporate bylaws that specify exclusive jurisdiction,” Adel Turki, head of Cornerstone’s finance practice, said in a statement.