In Sunday’s New York Times, Gretchen Morgenson bemoans the Delaware Supreme Court’s recent decision permitting corporations to adopt bylaws that shift the costs of unsuccessful shareholder litigation to those who bring the suit. Such rules allow a corporation that prevails in a shareholder suit against corporate malfeasance to collect attorneys’ fees.  She quotes only experts who share her views that Delaware law should be amended to prevent such fee shifting provisions.

But my initial review of the issue suggests that it would be a mistake to immediately prohibit such bylaws.  Substantial agency problems arise between the class action lawyers who typically bring such shareholder suits and the shareholders who are supposed to benefit.

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