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Attempts to reduce frivolous lawsuits losing out in Delaware

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Legislation that is awaiting the Delaware governor's signature removes a means of significantly reducing sometimes-frivolous litigation filed against company directors & officers.

S.B. 75, which was approved by the Delaware House of Representatives earlier this month and by the state Senate in May, would prohibit publicly traded corporations from adopting bylaws that force shareholders to pay legal fees if they do not win their lawsuits against the corporation.

A spokeswoman for the governor said in a statement, “The Governor intends to sign the bill, but the exact timing of that has not yet been determined.” More than half of all publicly traded firms are domiciled in Delaware.

S.B. 75 addresses a May 2014 ruling by the Delaware Supreme Court in ATP Tour v. Deutscher Tennis Bund in which the court upheld a bylaw that requires plaintiff shareholders who lose derivative litigation to pay defenses costs.

Opponents of the legislation said it had been hoped that if left to stand, the court ruling would cut back on the number of frivolous lawsuits filed against firms.

In a May 5 letter to members of the Delaware Senate, Harold H. Kim, executive vice president of the U.S. Chamber of Commerce's Institute for Legal Reform in Washington, had unsuccessfully urged senators to defeat the measure.

He said if adopted, the measure “would eliminate an important mechanism that corporations invoke to protect innocent shareholders against the costs of abusive litigation without providing an adequate replacement tool to deter the filing and prosecution of these illegitimate actions.”

Ninety-three percent of merger and acquisition deals valued at more than $100 million were litigated in 2014, according to a report by Boston-based Cornerstone Research Inc.

With fee shifting, “there's no doubt there would have been less litigation and we probably wouldn't see the kind of thing we see now, where virtually every M&A deal attracts a lawsuit,” although the court ruling “could have deterred meritorious litigation as well,” said Kevin LaCroix, executive vice president at RT ProExec, a division of R-T Specialty L.L.C. in Beachwood, Ohio.

Delaware's legislation may lead companies to incorporate elsewhere, says one observer.

“Basically, this opens the door to companies looking at other states a lot more seriously on whether to incorporate,” said Keith P. Bishop, a partner with law firm Allen, Matkins, Leck, Gamble, Mallory & Natsis L.L.P.in Irvine, California.

Mr. Bishop said he plans to encourage his clients to “think more openly” about where to incorporate.