Newest Abuse: Fee-Shifting

Corporate Executive Protection

breaking_news_3-150x150Just like grizzly bears that fear bees, executives of large corporations fear stockholder lawsuits. Execs are vexed by stockholders who raise questions about “fiduciary duty,” especially when it could result in top executive personal financial accountability to stockholders. Execs need protection from their stockholders.

Unless they incorporate in Delaware. Thousands of American corporations are crammed into the diminutive state of Delaware. It’s not the weather or scenery that brings them there, it’s the corporate-friendly legal structure. Set up an office, file some papers, pay lower taxes and be assured the state’s political and judicial systems will provide cover if stockholders get feisty.

The latest example is how (and why) the Delaware Supreme Court gave the OK for Delawarean corporations to adopt “fee-shifting” without prior stockholder approval or discussion. Fee-shifting shifts all the corporate legal costs—which will be stratospherically high—to the shareholders that lose a case against their corporation. If the suit ends in a settlement, the shareholders escape the fee-shift clause. However, the threat of the fee-shift penalty looms threat at the start of a suit. *

Fee-shifting might sound fair at first. There are frivolous lawsuits and lawyers who manipulate class action suits for less than noble reasons. But the growing evidence of misuse of corporate power is the spark that ignites stockholder lawsuits. Fee-shifting is not in the stockholders’ interest, or in the interest of Americans in general. Also, since regulators “have been remarkably reluctant when it comes to pursuing high-level miscreants,” * shareholders do not get much help from regulatory agencies lack of actions against top execs.

Perhaps the solution is to improve this bad rule by applying it to corporations that lose shareholder suits: Require execs to pay all stockholder legal expenses.

The prosecution rests.


*The source for this post and the above quotation is Gretchen Morgenson’s “Shareholders, Disarmed By a Court,” The New York Times, Sunday Business pages 1&6, 26 Oct 2014.


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