Saturday, September 27, 2014
In the meantime, several companies have adopted such bylaws, although some early challenges to the bylaws ended up being settled before courts could rule on their validity. J Robert Brown at Race-to-the-Bottom blog reports that a company just went public with a fee shifting charter provision in place (the provision purports to cover securities claims as well as governance claims, but, as I previously posted, I don't think that's possible).
Most interestingly, Oklahoma recently passed a law requiring "loser pays" rules for all derivative litigation. Which certainly creates an opportunity for a natural experiment in the idea of the market for corporate charters - will companies flock to Oklahoma? Will investors pressure managers to stay out of Oklahoma (or to go to Oklahoma, if they doubt the value of derivative litigation)?
Stephen Bainbridge reports that the SEC's Investor Advisory Committee will be considering fee-shifting bylaws at its next meeting, and asks (via approving linkage to Keith Paul Bishop) why should the Investor Advisory Committee be conferring with the SEC on a state law contract question?
Well, my answer would be, because the corporate form - by definition - includes judicial oversight as part of the corporate "contract" (if you call it a contract). Judicial construction of "terms" (if you call them terms) is inherent in its nature, and an important part of ensuring that corporate managers do not exploit shareholders. Fee-shifting undermines that bargain, especially if applied to representative litigation (where the shareholder has only a small upside but a very large potential downside). For that reason, the Investor Advisory Committee and the SEC have an interest in making sure that investors "get" what they expect to get - a corporation, which includes judicial oversight as inherent in the organizational form.
And it's not like the SEC hasn't - under the guise of investor protection - policed matters of internal corporate governance before. For example, the NYSE (which acts under the SEC's direction) requires shareholder votes for certain large new stock issuances in terms of equity or voting power. The NYSE also forbids disparate reduction in common stock voting power. One could easily imagine that, even if the SEC doesn't act directly, the NYSE could adopt a rule requiring that listed companies not adopt fee-shifting bylaws.
Oklahoma, however, adds a new wrinkle - I imagine it's not home to many publicly traded corporations, but it's difficult to imagine the SEC relishing the idea of preempting Oklahoma law on this subject, or the NYSE categorically refusing to list Oklahoma corporations.