Here is an interesting article, again from the New York Times, by Gretchen Morgenson, "Shareholders, Disarmed by a Delaware Court", 25 October 2014.
"Who will hold corporate executives and directors accountable for wrongdoing?...Hoping to achieve greater accountability, wronged investors have filed many cases against top corporate officials, accusing them of breaching fiduciary duties and of other misdeeds. But even this enforcement mechanism is under attack, thanks to a recent decision by the Delaware Supreme Court.
In a proceeding last May, the court ruled that a company can adopt, without shareholder approval, bylaws requiring investors who file lawsuits against it to pay the company's legal fees if the suit is unsuccessful. The court went so far as to say that a company's 'intent to deter litigation' might be a proper purpose for shifting legal fees to a plaintiff."
Morgenson takes a populist view that this ruling will affect shareholders without deep pockets, and that is true. But I want to address that there are also shareholders like Bill Ackman, along with his co-hort from the activist hedge fund community, with very, very deep pockets and the desire to continuously throw legal lightening bolts at the companies they are trying to squeeze short-term profits from. Bill "I Heart Depositions" Ackman has threatened (he's always making threats; getting harder to keep track of 'em all) to go after the Allergan Board for breaching their fiduciary duties, that they'll never ever ever get to sit together on another board, etc. Could something like this (the Delaware Court ruling on plaintiffs who file unsuccessful litigation pick up the defendant company's legal bills) give an activist/opportunist investor pause? And even if it doesn't (because, after all, their pockets are deep), why should the rest of the shareholders (filled with many pension fund and individual small shareholders) pick up the double-digit-million litigation tab that Allergan must sustain to fight against a vanity investor like Bill Ackman?
And should Allergan's Board exercise their right at some point to adopt this language in their bylaws? (Remember that Allergan is incorporated in Delaware where the ruling took place, and that the court ruled the company can adopt these bylaws without shareholder approval.)