Delaware: The Sue-Me State for corporations

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.

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.

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.