A new bill in the New Jersey legislature is supposed to curb frivolous shareholder lawsuits, but would instead deny many shareholders their right to a day in court.
Assembly Bill 3123, sponsored by Assemblyman Patrick J. Diegnan, Jr. (D-Middlesex) would allow judges to order the plaintiff in a shareholder derivative or class action lawsuit to pay the defendant corporation’s legal fees and expenses if they determine that the lawsuit “was commenced or maintained without the exercise of reasonable diligence by the plaintiff or without reasonable cause or for an improper purpose.”
Another provision requires plaintiffs who own less than 5% of the corporation’s shares, or whose shares are worth less than $250,000, to post a bond that can be used to satisfy an attorneys’ fee award in order to proceed with the case.
Curbing frivolous lawsuits is an admirable goal. But legislators must also protect shareholders’ rights to sue corporations who violate the law. The New Jersey bill fails on both fronts.
New Jersey already has rules in place to prevent frivolous lawsuits. For example, an existing New Jersey law allows courts to award attorneys’ fees to the prevailing party in any civil lawsuit—including shareholder derivative and class actions—if it determines that the opposing party’s case was frivolous. Additionally, New Jersey court rules allow judges to award costs and fees with respect to an individual frivolous motion or other paper. The new bill adds an additional layer of complexity and potential confusion to the existing scheme.
More importantly, the bill may discourage shareholders from filing legitimate suits. Federal and state regulatory authorities simply do not have the time and resources to investigate and prosecute all corporate misconduct. Private shareholder derivative suits and class actions are an important supplement to the government’s limited resources.
However, the threat of having to pay attorneys’ fees and expenses for the defendant corporation is likely to create a chilling effect, deterring shareholders and their attorneys from filing meritorious suits, for fear of the potentially ruinous consequences of a large fee and expense award. Shareholders and their lawyers already risk a great deal by filing derivative and class actions. Such cases often last for years, and there is no guarantee of financial recovery. The potential of having to pay the defendant’s legal bills may raise the risk level so high that plaintiffs are too afraid to sue.
The real purpose of the bill is probably to bring business to New Jersey by enticing corporations to move there to take advantage of the bill’s chilling effect on shareholder litigation. While such a strategy may yield short-term gains for the state, joining the race to the bottom on corporate law will ultimately hurt more than it helps.
If you are a New Jersey resident and wish to contact your Assemblyperson or Senator about the bill, you can find their contact information here. Assemblyman Diegnan, Jr., can be reached by mail at 908 Oak Tree Ave., Unit P, South Plainfield, NJ 07080, or by telephone at (908) 757-1677.
