Outside-IN

Outside-INblog

Outside voices and views for advisers

Delaware: The Sue-Me State for shareholders

The first state to ratify the constitution will soon become the unchallenged capital of shareholder litigation

Sep 3, 2014 @ 10:49 am

By Aaron Elstein

Ah, Delaware. The first state to ratify the constitution. Home of the Fightin' Blue Hens college football team — and Dogfish Head 60 Minute IPA. The place where I-95 traffic invariably grinds to a halt. And soon, the unchallenged capital of shareholder litigation.

In the past year or so, more than 30 major companies have quietly amended their bylaws to say Delaware courts are the only place where shareholders can file lawsuits alleging misdeeds by corporations, their managers or directors. Last week, consulting giant Towers Watson & Co. became the latest to tell litigants "See you in Wilmington."

More on Towers Watson in a minute, but first let's tackle the question, "Why Delaware?"

The tiny state occupies a giant place in the world of corporate law. Most big companies are legally incorporated there, even if they're actually headquartered somewhere else, in large part because Delaware courts have traditionally handed down rulings favorable to business.

Just how favorable? Last year, the state's Chancery Court ruled that corporations could change their bylaws to say that losers in shareholder lawsuits have to pay the other side's legal fees. In May, the Delaware Supreme Court sweetened the deal by deciding that companies could change the rules of the game even if they were already tangled up in suits.

(Here's a story of one company that listened to shareholders.)

For companies weary of shareholder suits — and that's just about all of them — the news couldn't have been better. The New York State Common Retirement Fund and other big investors have publicly objected to companies restricting the rights of investors to seek redress in court, but the Delaware litigation migration seems to have legs. Ralph Lauren, J.C. Penney and Honeywell International have already made the trek.

As for Towers Watson, it might be routing shareholder suits to Delaware because it didn't like the outcome of a case recently settled 32 miles north in Philadelphia. The suit was filed by a former CEO and several other partners at the old Towers Perrin who over the years sold their shares to their successors for $150 million. The former executives alleged they were cheated out of millions when the succeeding partners merged Towers with Watson Wyatt in 2009 in a $1.6 billion deal. The plaintiffs sought $800 million.

The new regime at Towers Watson fought their former executives for nearly four years, shelling out hefty fees to the firm's attorneys at Milbank Tweed Hadley & McCloy and Morgan Lewis & Bockius. Last summer, Towers Watson agreed to settle the matter for $10 million. A spokesman for the firm did not respond to a request for comment.

Aaron Elstein is senior reporter at sister publication Crain's New York Business.

0
Comments

What do you think?

View comments

Recommended for you

Featured video

INTV

Advisers beware: tax law has unintended consequences

Commission accounts could be preferable for some clients, and advisers could be incentivized to move from employee broker-dealers to independent channels.

Recommended Video

Path to growth

Latest news & opinion

El-Erian warns advisers on ETF liquidity

If investors decide to exit exchange-traded funds en masse, things could get nasty, economist says.

Pass-through provision in new tax law could benefit REITs, MLPs

Investors in such instruments are eligible for a 20% tax deduction as a result of the pass-through provision.

Fidelity charging new fee on Vanguard assets held in 401(k) plans

The 0.05% fee is ostensibly a response to Vanguard's distribution model, but may also make the company's funds less attractive due to higher cost.

UBS adviser count continues to decline

Firm to merge U.S., global wealth management units on Feb. 1

TD Ameritrade launches all-night trading for ETFs

Twelve funds now can be traded after-hours, but the list will grow, company says.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print