Danaher Investors Challenge Company's Delaware-Only Shareholder Suit Rules
By Jef Feeley and Dawn McCarty – Feb 8, 2012 11:24 AM ET
Shareholders of AutoNation Inc., the largest U.S. automobile retailer, travel website Priceline.com and truck maker Navistar International Corp. are also challenging the policy. They said in lawsuits made public yesterday that the companies violated investor rights by requiring litigation to be heard in Chancery Court in Delaware, where judges hear cases without juries.
Such a provision “permits directors to control the forum for litigation against them and thereby reduces their risk of liability,” while avoiding jury trials, according to the plaintiffs, pension funds with investments in the companies.
Founded in 1792, the Wilmington-based court has become a top forum for litigating business disputes because more than 60 percent of Fortune 500 companies are incorporated in the state, according to Jill Fisch, a professor of business law at the University of Pennsylvania in Philadelphia.
Washington-based Danaher, Fort Lauderdale, Florida-based AutoNation, Norwalk Connecticut-based Priceline and Lisle, Illinois-based Navistar are all incorporated in Delaware.
Companies incorporate in Delaware to take advantage of laws that give their directors wide latitude and to gain access to the Chancery Court, which provides fast-track trials in which punitive damages are banned. Chancery cases can be heard quickly by judges experienced in corporate law.
Matt McGrew, a spokesman for Danaher, Marc Cannon, a spokesman for AutoNation; Brian Ek, a Priceline spokesman; and Steve Schrier, a Navistar spokesman, didn’t immediately respond to e-mails seeking comment regarding the lawsuits.
The pension plans’ suits were filed in Chancery Court jointly by law firms Kessler Topaz Meltzer & Check LLP of Radnor, Pennsylvania, and Prickett, Jones & Elliott, PA, of Wilmington.
The venue restriction is just one way companies can try to discourage shareholder litigation and control costs.
Carlyle Group LP, a Washington-based private equity firm that is planning an initial public offering, last month pushed to require arbitration of shareholder disputes. The buyout firm dropped the plan Feb. 3 after officials at the U.S. Securities and Exchange Commission said they wouldn’t approve the share sale if the provision was adopted.
In 2010, the Chancery Court adopted a process that allows one of its five judges to preside over arbitrations, in which limits on the exchange of evidence between contending parties are more restrictive than in conventional lawsuits and proceedings can be kept confidential.
The validity of the Delaware-only bylaws is uncertain, said Larry Hamermesh, a professor at Widener University’s law school in Wilmington who specializes in corporate law.
“Bylaws like these can be adopted by the board without shareholder approval,” he said. “That casts some doubt on their legitimacy.”
U.S. District Judge Richard Seeborg in San Francisco ruled in January 2011 that corporate directors can’t dictate venue for shareholder derivative cases by adopting a bylaw limiting the action to Delaware Chancery Court. The parties may contract for a venue, he said. Seeborg, a federal judge, didn’t decide whether such bylaws are valid under Delaware law.
The bylaws raise questions about whether a company can require claims that could otherwise be filed in federal courts to instead be brought only in state court in Delaware, Hamermesh said.
The cases are Boilermakers Local 154 v. Priceline.com, CA7216; Boilermakers Local 154 and Key West Police & Fire Pension Fund v. Danaher, CA7218; Larry Sutton v. AutoNation, CA7221; and Singh v. Navistar, CA7222, Delaware Chancery Court (Wilmington).
To contact the editor responsible for this story: Michael Hytha at firstname.lastname@example.org