Here’s a concept. Sue a business and if you lose, you pay the attorney’s fees for the business.
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That was the recent decision from the Delaware Supreme Court. Delaware courts hold a lot of sway in the corporate world because a lot of companies are incorporated in Delaware. One corporation included a loser pays proviso in its bylaws. That was determined to be valid by the Delaware Supreme Court.
Two-thirds of the Fortune 500 companies are incorporated in Delaware.
“It is settled that contracting parties may agree … to obligate the losing party to pay the prevailing party’s fees,” one of the justices wrote.
The decision came about from a lawsuit that ATP Tours has been trying to collect $18 million in legal fees after its members lost a lawsuit. ATP Tours Inc. oversees men’s professional tennis. Its members sued over a change in the tour’s schedule. Apparently it had a bylaw requiring the members to pay ATP’s expenses if they lost a lawsuit.
Bylaws govern how a corporation deals with shareholders. Corporations incorporated in Delaware are sure to start adopting such bylaws if they don’t have them already. This will halt the plague of shareholder lawsuits by attorneys looking to pad their law firms’ balance sheets with the typical settlement pay-out of $500,000. How much of that class-action money goes back to millions of shareholders in the typical company? If you guessed zilch you would be in the ballpark.
“Any way that companies see to stem the litigation epidemic is likely to be attractive,” William B. Chandler III, a former Delaware Chancery Court judge who is now a law firm partner told the Wall Street Journal.
In 2013, the lower Court of Chancery upheld bylaws of Chevron and FedEx that required shareholders suing them to do so in Chancery Court in Delaware. That stopped the multi-state blunderbuss lawsuit gambit.
There’s a reason businesses incorporate in Delaware. The biggest reason is that the courts have a thorough knowledge of business law and corporate law. They have separate courts for corporate law than for general law. The state, through its chancery courts has established a solid body of case law. Further, it has no state corporate income tax.
Nevada, of course, is competing with Delaware. Unlike Delaware, Nevada has no franchise tax. Like Delaware it has no corporate income tax. Additionally, it has no personal income tax. Its courts also have developed business expertise and case law. Delaware, though, with its separate Chancery Court, holds an advantage. And now it has a Delaware Supreme Court ruling validating loser-pays bylaws.