Corporate America doesn’t like whistleblowers. At least those companies that break the law and defraud taxpayers. While many of America’s largest banks and corporations try to pretend that they are great neighbors and care about the community, the opposite is true. A recent article in the New York Law Journal says that in the 90 days after a Delaware Supreme Court decision was announced in May, twenty four companies adopted “loser pays” bylaws requiring the loser of intracorporate litigation against the company to pay the winner’s legal fees.
Loser pays? At first the concept sounds fair until one reads the fine print. Most say the “loser pays” provision works in only one direction. Specifically, if a shareholder brings some type of shareholder derivative suit against the company and loses, the shareholder pays the company’s legal expenses. If the shareholder wins, however, the company doesn’t have to pay. Worse, many of these loser pays bylaws say the shareholder must still pay the company’s legal fees even if it wins unless the shareholder has a complete victory.
Expressed in different terms, the author of article said it is like having a rule in the Super Bowl that one side could not have any penalties called against it.
This type of bylaw obviously has a chilling effect on shareholders. Unfortunately, it potentially has a devastating effect on whistleblowers too. Since many whistleblowers are insiders, these bylaws could potentially scare them from complaining about internal fraud for fear of being responsible for legal fees. The article said one provision was so broad as to cover any “proceeding, whether civil, criminal, administrative or investigative.” Theoretically, a shareholder who seeks to report the company to the SEC could be held liable if his or her whistleblower claim was denied.
At this point, the risk is hypothetical. The SEC whistleblower program has very powerful anti-retaliation provisions that probably trump these new bylaws. Big and sleazy companies deal in perceptions, however. The threat is always there that somehow they can punish whistleblowers or shareholders who dare challenge the status quo.
Admittedly, some shareholder derivative cases are purely frivolous and companies should have the ability to protect itself against meritless claims. Passing bylaws that attempt to shut down legitimate challenges doesn’t fix anything, however. More often than not, it is the company that has something to hide.
A large percentage of businesses are incorporated in Delaware. The state bar has proposed legislation to rein in some of the more extreme “loser pay” bylaw proposals but that legislation is likely to face tough challenges. Will the legislature stand up to corporate greed and hubris? We may soon find out.
Meanwhile, while the new bylaw provisions certainly do a have a chilling effect on whistleblowers and corporate insiders seeking to take on fraud or mismanagement, we think that whistleblowers have little to fear. We do recommend hiring a good whistleblower lawyer before filing any claims, however.
Think you have inside knowledge of violation of U.S. securities laws and are interested in filing an SEC whistleblower claim? Give us a call. For more information contact attorney Brian Mahany at or by telephone at (414) 704-6731. All inquiries kept in confidence.