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Corporate Bylaws and Shareholder Lawsuits

When it comes to shareholder derivative lawsuits, companies can often find themselves in an arms race with their own shareholders. Derivative lawsuits are tools that shareholders can use to bring a lawsuit on behalf of a company that they are invested in, when the directors or officers of the company refuse to bring a lawsuit themselves. Usually, this means that derivative lawsuits are brought by shareholders on behalf of the company against the company’s own directors for some alleged wrong.

Naturally, many companies are seeking ways to avoid these lawsuits. While self-interest on the part of the directors plays a role in that decision, frivolous derivative lawsuits can also cost the company money to defend, which then harms other shareholders. This leaves courts stuck trying to determine the validity of such defensive measures, balancing the shareholders’ rights to hold directors responsible for breaches of their fiduciary duties with companies’ need to be free from spurious litigation.

One set of defensive measures is currently working its way through courts across the country: restrictive bylaws. These are provisions adopted into the bylaws that make it more difficult to bring a shareholder derivative suit.

Forum-Selection Bylaws

One type of restrictive bylaw is the forum-selection bylaw. These corporate provisions, which have been approved by courts in Delaware, mandate that intracorporate disputes need to be litigated in a specific state, usually the company’s state of incorporation. This can help companies select law favorable to them, and it can also prevent companies from being forced to defend against shareholder lawsuits across the country, which can save money for companies and uninvolved shareholders.

Mandatory-Arbitration Bylaws

Another provision that can lower the cost of a shareholder dispute is a mandatory-arbitration bylaw. These bylaws require that shareholders settle their claims through arbitration rather than litigation. Mandatory binding arbitration can often be a faster process that can save the parties both time and money, letting shareholders vindicate their rights without unnecessarily expending corporate resources.

Fee-Shifting Bylaws

Another potential type of bylaw that may be put in place to restrict derivative suits is a fee-shifting bylaw. As its name suggests, these bylaws impose extra legal fees on the loser in a derivative lawsuit. Absent such a bylaw, each side in the lawsuit would pay its own costs, regardless of who won or lost. Consequently, shifting the winner’s legal costs on the losers could be a powerful deterrent to frivolous lawsuits by people looking for a quick settlement.

Minimum-Stake-to-Sue Bylaws

Minimum-stake-to-sue bylaws are a more creative type of restrictive bylaw, the validity of which is currently being litigated in a Florida case. These bylaws attempt to deter shareholders with very small stakes in a company from bringing a derivative lawsuit on their own. Instead, the bylaw requires consent from some percentage of the shareholders before bringing a lawsuit. In the pending case, the bylaw specified that consent needed to come from at least 3 percent of shareholders.

If you are involved in a shareholder dispute and want to learn more about your rights, contact the Florida business litigation attorneys at Pike & Lustig, LLP today for more information.

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