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Delaware ditches bill to bar 'loser pays' corporate bylaws

By Tom Hals

(Reuters) - Delaware lawmakers will not take up a bill this year that would have barred corporations from adopting rules to require shareholders who sue and lose to pick up the costs of the litigation.

The rules, known as "loser pays" or fee-shifting bylaws, became a front-burner issue in May when the Delaware Supreme Court said companies could adopt them to curtail investor litigation.

The ruling upends the standard "American rule" of U.S. litigation in which each party bears their own legal costs.

Fee-shifting bylaws might dramatically change investor litigation. They raise the prospect that a shareholder with an investment of a few thousand dollars could sue over executive compensation or a merger price, lose and end up owing the company millions of dollars to cover legal costs.

The issue caught Delaware lawmakers between the interests of the state's legal industry, which often litigates investor lawsuits, and big business groups that saw the bylaws as a way to cut potentially meritless lawsuits.

Corporations flock to charter businesses in the state and fees associated with incorporating those businesses make up as much as 40 percent of Delaware's general budget revenue.

On Wednesday, the Delaware Senate adopted a resolution to continue examining the issue, according to Senator Bryan Townsend. He had sponsored the bill to bar fee-shifting which had been pulled from the Senate's agenda earlier this month.

It's unclear if any corporations have adopted the bylaws since the May 8 Delaware Supreme Court ruling in the case involving ATP Tour Inc, which oversees men's professional tennis.

(Reporting by Tom Hals in Wilmington, Delaware; Editing by Stephen Coates)

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