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).