File Early, Then Free Ride: How Delaware Law (Mis)Shapes Shareholder Class Actions

Delaware courts have largely privatized enforcement of fiduciary duties in public corporations. In In re Fuqua Industries, Inc. Shareholder Litigation, Chancellor Chandler expressly acknowledged this judicial policy. He noted that Delaware courts implement it partly by allowing private attorneys, working on a contingent fee basis, to initiate and maintain derivative and class actions in the names of "nominal shareholder plaintiffs." Attorneys are subject only to the relatively weak constraints that they must inform their "clients" and receive their consent before they file shareholder suits. Further, Delaware courts use cost and fee shifting mechanisms to "economically incentivize" those attorneys to initiate such suits.

Chancellor Chandler also explained that Delaware courts have adopted this policy because they believe that the plaintiffs' bar is capable of performing a valuable "service on behalf of shareholders." Plaintiffs' attorneys understand "abstruse issues of corporate governance and fiduciary duties" far better than do most shareholders. Consequently, they are uniquely qualified to identify situations in which principles of corporate governance have been violated or fiduciary duties have been breached and then to initiate lawsuits seeking corrective action.