The tension between boards and investors: boards would benefit from a clearer understanding of the role they expect the company's shareholders to play.

• Author: Raymond, Doug
• Position: LEGAL BRIEF

AN INTERESTING DYNAMIC has been playing out in recent years as boards and shareholders have struggled to find the proper roles for each in corporate governance, particularly of public companies. This tension has been evident on many fronts, from the adoption of SEC regulations that mandate shareholder voting on executive compensation to the SEC's attempts to expand proxy access for shareholder-nominated directors, the growing acceptance of a majority voting standard in director elections and the decline in the number of companies with standing poison pills. Most of these changes have been championed by institutional investor groups and their advisors, and not infrequently corporate boards have resisted these and similar changes as too much of an intrusion into their oversight of the corporation.

Recently there has been something of a backlash to this trend, a reaction to the significant increase over the last several years in shareholder and derivative litigation that challenges board action. Particularly in the context of a sale of control of a public company, the directors' decision to sell is today uniformly challenged, among other claims, as a breach of the directors' fiduciary duties. Similarly, legal challenges to executive compensation and other decisions by boards have become increasingly common. While the right of shareholders to bring legal actions to hold boards accountable for their actions is a bulwark of good governance, many consider that much of this litigation is brought more for the benefit of the lawyers than to protect the interests of shareholders. Clearly, it cannot be that the directors have breached fiduciary duties in every merger transaction.

As the increase in shareholder litigation shows no signs of abating, some boards have taken steps to discourage litigation against them. One method is to adopt a bylaw that mandates a single exclusive forum for lawsuits that assert a derivative claim against the corporation's directors and officers or any claim for breach of fiduciary duty. These provisions have been used to prevent cases from being filed in jurisdictions that are seen as overly plaintiff-friendly.

More recently, some boards have adopted bylaws that would obligate the losing plaintiff in a lawsuit involving the governance of the corporation to pay the corporation's legal fees. This is a departure from the usual rule in U.S. lawsuits, where parties generally pay their own bills. Last spring the Delaware Supreme...