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Why The SEC Should Stay Out Of The Fee-Shifting Charter Debate

In a recent post, Columbia Law School Professor John C. Coffee Jr. argues that the Securities and Exchange Commission should take a number of steps to challenge and discourage the adoption of fee-shifting charter provisions.  I disagree.

Professor Coffee does not identify any market failures that prevent investors from adequately assessing any risks associated with fee-shifting charter provisions.  The existence of these provisions are fully disclosed either in the ’33 Act prospectus (and exhibits) or in ’34 Act reports filed with the SEC.  What does the SEC (and Professor Coffee) know that the market doesn’t?

Companies with fee-shifting charter provisions, such as Smart & Final Stores, Inc., have been successful in completing IPOs.  Why?  Perhaps, these provisions actually benefit investors by mitigating the dissipation of company resources on insurance premiums, legal fees and costs of settlement.

If the SEC takes action to strangle fee-shifting charter provisions in the crib, as Professor Coffee urges, it will forestall experimentation and choice.  Recently, for example, Oklahoma has enacted legislation requiring the shifting of fees in derivative suits.  Other states, including Delaware, may take opposite or different approaches.  Why not let the law develop democratically and evolutionarily in response to market forces?  As Justice Louis Brandeis wrote:

It is one of the happy incidents of the federal system that a single courageous State may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.

New State Ice Co. V. Liebman, 285 U.S. 262, 311 (1932).

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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm

Keith Paul Bishop is a partner in Allen Matkins' Corporate and Securities practice group, and works out of the Orange County office. He represents clients in a wide range of corporate transactions, including public and private securities offerings of debt and equity, mergers and acquisitions, proxy contests and tender offers, corporate governance matters and federal and state securities laws (including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act), investment adviser, financial services regulation, and California administrative law. He regularly advises clients...