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Date: April 27, 1995

The Attorney General of California has prepared the following title and summary of the chief purpose and points of the proposed measure:

ATTORNEYS' FEES. SHAREHOLDER ACTIONS. CLASS ACTIONS. INITIATIVE STATUTE.

Requires losing party to pay winning party's reasonable attorneys fees and expenses in shareholder actions against corporations and in class actions based on securities law violations. Payment by member of losing party not required if position was substantially justified and payment would be unjust. Court may require losing party's attorney to pay. After hearing, court may require plaintiff to furnish bond for defendant's estimated fees and expenses, unless plaintiff owns or traded at least 5% of shares. Plaintiff's attorney may agree to furnish bond and pay defendant's fees and expenses for plaintiff. Summary by Legislative Analyst and Director of Finance of fiscal impact on state and local governments: The fiscal impact of this measure on state and local governments is unknown. It could result in either net savings or costs, depending largely on how attorneys and their clients respond.

Shareholder Litigation Reform Act

SECTION ONE. This Act shall be known and may be cited as the "Shareholder Litigation Reform Act."

SECTION TWO. The People of the State of California find and declare:

(a) Meritorious shareholder lawsuits play a critical role in deterring misconduct by corporate directors and officers and in maintaining the integrity of securities markets, which are a vital source of capital for California businesses. However, meritless shareholder lawsuits impose enormous costs on California businesses and shareholders. These costs deprive California of resources that could be used to make investments in new products and services, expand existing businesses, and create new jobs. Since the most common targets of these meritless shareholder lawsuits are innovative, entrepreneurial businesses, such as high- technology companies, these lawsuits pose an especially serious threat to California's economy and the state's ability to generate new jobs.

(b) The present legal system encourages the filing of such meritless shareholder lawsuits.

(c) Because the potential profit to lawyers filing such lawsuits is so great, the lawyers themselves often initiate these cases by recruiting potential plaintiffs to sue a company. And because the cost in time and money required to defend against such lawsuits is substantial, many companies innocent of wrongdoing are nonetheless forced to settle - encouraging lawyers to file still more such suits.

(d) Under the present legal system, shareholders who have been defrauded cannot obtain fair compensation for their losses since their recovery is typically reduced by as much as one-third to pay the contingent fees of attorneys who brought the case.

(e) Many of the meritless shareholder lawsuits filed today could be discouraged without discouraging lawsuits that do have merit. This could be accomplished by:

(1) Requiring the loser or the loser's attorney in a securities class action or shareholder derivative lawsuit to pay the winner's costs, including reasonable attorney's fees, unless the court determines that circumstances would make it unjust to do so; and

(2) Requiring the named plaintiffs in such a lawsuit to post a bond to secure their obligation to pay these costs if they lose, unless the named plaintiffs constitute 5% of the class.

(f) Imposing such a "loer-pays" rule on litigants in shareholder lawsuits would help to protect companies and their shareholders from the costs of meritless litigation, would encourage companies that were guilty of wrongdoing to make early settlement offers, and would allow shareholders who did have meritorious claims to recoup the legal costs of pursuing those claims.

SECTION THREE. Section 800.5 is added to the Corporations Code to read as follows:

800.5(a) [APPLICATION] This section applies to any shareholder derivative action and any securities law class action based in whole or in part on California law, notwithstanding any other provision of law. All references in this section to "plaintiffs" or "defendants" refer also the singular of those terms in cases involving a single defendant or plaintiff.

(b) [AWARD OF FEES AND EXPENSES] (1) In any shareholder derivative action or securities law class action, if a final judgment that is not appealed or is no longer subject to appeal is entered in favor of either the plaintiffs or the defendants (the "prevailing party"), the opposing party (the "losing party") shall be liable to the prevailing party for the reasonable fees and expenses incurred by the prevailing party in the prosecution or defense of the action, except as provided in paragraph (4) of this subdivision (b). However, if the defendants make an offer of judgment under Section 998 of the Code of Civil Procedure which is not accepted by the plaintiffs and the judgment is not greater than the amount of that offer, the defendants shall be considered the prevailing party.

(2) If judgment is entered in favor of the plaintiffs on some of the claims in the complaint and in favor of the defendants on others, the court shall allocate the liability for fees and expenses between the parties based upon the fees and expenses incurred with respect to each claim. The amounts for which each of the opposing parties is determined to be liable shall be off set against each other.

(3) In the case of multiple named plaintiffs, the proportion of the prevailing defendants' fees and expenses for which each named plaintiff is liability shall be equal to the proportion of the total claims of all named plaintiffs which that named plaintiff's claim represents. In the case of multiple defendants, the proportion of the prevailing plaintiffs' fees and expenses for which each defendant is liable shall be equal to the proportion of the total judgments against all defendants which the judgment against that defendant represents, unless otherwise determined by the court to prevent an injustice.

(4) If the losing party establishes that its position was substantially justified, the court shall waive the liability of any member of the losing party for fees and expenses if requiring that member of the losing party to pay its full share of such fees and expenses would be unjust. A losing party's position is substantially justified if it has a reasonable basis both in law and in fact. This provision shall not apply with respect to the liability of any plaintiff if an attorney has agreed to indemnify that plaintiff against such liability pursuant to subdivision (h).

(c) [APPLICATION FOR FEES AND EXPENSES] A party seeking an award of fees and expenses shall, within 30 days of a final judgment in the action that is not appealed or is no longer subject to appeal, submit to the court an application for fees and expenses that verifies that the party is entitled to such an award under subdivision (b) and the amount sought, including an itemized statement from any attorney or expert witness representing or appearing on behalf of the party stating the actual time expended and the rate at which fees and expenses are computed.

(d) [ALLOCATION AND SIZE OF AWARD] The court, in its discretion, may -

(1) determine whether the amount to be awarded pursuant to this section shall be awarded against the losing party, its attorney, or both; and

(2) reduce the amount to be awarded pursuant to this section, or deny an award, to the extent that the prevailing party during the course of the proceedings engaged in conduct hat unduly and unreasonably protracted the final resolution of the matter in controversy.

(e) [SECURITY FOR PAYMENT OF FEES AND EXPENSES] (1) In any shareholder derivative action or securities law class action, the named plaintiffs shall, upon motion duly made as provided in paragraph (3) of this subdivision (e) by any defendant (including the entity in a shareholder derivative action) and granted by the court after notice and hearing, furnish a bond to secure the named plaintiffs' liability under subdivision (b) of this section for the defendants' estimated fees and expenses, as determined by the court, except as provided in paragraph (2) of this subdivision (e). All references in this subdivision (e) to a "motion for security" mean a motion made under this paragraph (1).

(2) No bond shall be required if the named plaintiffs show to the satisfaction of the court that in the case of a shareholder derivative action the named plaintiffs own at the time of the ruling on the motion 5% or more of the total outstanding common shares of the organization, or in the case of a securities law class action, the named plaintiffs traded 5% or more of the total number of shares traded during the class period, provided that in determining the total number of shares traded only 50% of the reported volume of trading on NASDAQ shall be included.

(3) The motion for security may be made at any time within 30 days after service of the summons in the case of a shareholder derivative action or any time within 30 days after conditional or final certification of the class in the case of a securities law class action and shall be heard by the court as expeditiously as possible. The court shall consider such evidence, written or oral, by witnesses or affidavit, as may be relevant to any ground for denial of the motion under paragraph (2) of this subdivision (e) and to a determination of the fees and expenses likely to be incurred by the moving party in the defense of the action. If the motion is granted, the order shall fix the amount of the bond in the amount of the estimated fees and expenses as determined by the court. A ruling by the court on the motion shall not be a determination of any issue in the action or of the merits thereof. The court may for good cause shown extend the time period specified in this paragraph (3) for an additional period not to exceed 60 days and may increase or decrease the amount of any security required on a showing of changed circumstances.

(4) If the court makes a determination that a bond shall be furnished by the named plaintiffs as to any one or more defendants and the bond is not furnished within such time as may be fixed by the court, the action shall be dismissed without prejudice to the individual plaintiffs' rights to pursue an action in their individual capacities.

(f) [STAY OF DISCOVERY] (1) Except as provided in paragraph (3) of this subdivision (f), all discovery in a shareholder derivative action shall be stayed for at least 30 days after the service of the summons. If the court has extended the time allowed for making a motion for security, pursuant to subdivision (e), discovery shall be stayed until the expiration of such additional time allowed. If a motion for security is made, discovery shall be stayed until 10 days after the motion is disposed of.

(2) Except as provided in paragraph (3) of this subdivision (f), all discovery in a securities law class action shall be stayed until at least 30 days after the conditional or final certification of the class. If the court has extended the time allowed for making a motion for security, pursuant to subdivision (e), discovery shall be stayed until the expiration of such additional time allowed. If a motion for security is made, discovery shall be stayed until 10 days after the motion is disposed of.

(3) The stays of discovery provided for in this subdivision (f) do not apply to discovery with respect to any ground for denial of a motion for security or with respect to class certification.

(g) [NOTIFICATION OF SHAREHOLDERS] Upon motion of the named plaintiff, the court may order that a notice be given to the shareholders or otential class members of the pendency of the action and of the fact that any shareholder or class member may join the action as a named plaintiff. That notice may be given by publication in such manner as may be directed by the court, unless the court rules that personal service by mail is feasible and necessary. The expense of such notice shall be borne by the named plaintiffs.

(h) [INDEMNIFICATION OF PLAINTIFFS BY ATTORNEY] The attorney for the plaintiffs in any shareholder derivative action or securities law class action may agree to indemnify any named plaintiffs or persons considering becoming a named plaintiff against any liability under this section and may furnish any security required under this section on behalf of the named plaintiffs, notwithstanding any provision of the State Bar Rules of Professional Conduct. An attorney who agrees to indemnify a plaintiff or plaintiffs under this provision shall be primarily liable. An offer to indemnify persons joining as named plaintiffs may be included in the notice referred to in subdivision (g).

(i) For the purposes of this action:

(1) A "shareholder derivative action" means any action instituted in the right of any corporation, domestic or foreign, partnership or any other organization (the "entity") with respect to which such an action may be maintained by a shareholder or holder of a voting trust certificate or a partner or a member alleging a wrong to the entity. "Shareholder" as used in this section includes such holders, partners and members, and "shares" includes such certificates, partnership interests and memberships.

(2) A "securities law action" means an action alleging wrongful conduct by the defendant in connection with the purchase or sale of securities.

(3) A "class action" means an action sought to be maintained by the named plaintiffs on behalf of a class of persons with a common interest or involving common questions of law or fact, if the persons to be benefited are too numerous for the joinder of all in the action to be practicable.

(4) "Fees and expenses" means reasonable attorney's fees and other reasonable expenses incurred by a party in the prosecution or defense of an action covered by this section. Reasonable attorney's fees are the reasonable hourly charges multiplied by the reasonable number of hours spent on a case, as determined by the court. For purposes of determining the liability of the losing party, reasonable attorney's fees incurred by plaintiffs do not include any amounts allowed by the court (A) under any common fund or substantial benefit theory or (B) as a result of applying a "multiplier" to the reasonable hourly charges in order to compensate the attorney for the risk involved in representing the plaintiffs on a contingent-fee basis. However, nothing herein shall limit the authority of the court to award an attorney out of the damages awarded fees based on any common fund or substantial benefit theory or based on the application of such a "multiplier". Reasonable expenses other than attorney's fees include the reasonable expenses of expert witnesses, the reasonable cost of any study, analysis, report, test, or project which is found by the court to be necessary for the preparation of the party's case, costs allowable under Sections 1032 and 1033.5 of the Code of Civil Procedure, and attorney's expenses other than fees. However, reasonable expenses do not include overhead charges or employee salaries of the law firm representing a party.

SECTION FOUR. The State Bar shall, with the approval of the Supreme Court, amend the Rules of Professional Conduct of the State Bar, if necessary, in order to confirm such Rules to subdivision (h) of Section 800.5 of the Corporations Code.

SECTION FIVE. Section 800 of the Corporations Code is amended to read as follows:

SECTION SIX. Section 15702 of the Corporations Code is amended to read as follows:

SECTION SEVEN. Section 17501 of the Corporations Code is amended to read as follows:

[NOTE: The above three sections are technical amendments made to existing law to conform such laws to the initiative. Sine we are required to set forth the entire text of any section of existing law to which we propose to make amendments, the content of these sections of the initiative are quite lengthy. In the interests of saving space, we have deleted the content of these sections from this copy. If you wish to see the measure exactly as filed, let us know.]

SECTION EIGHT. (a) Except as provided in subdivision (b) of this section, the provisions of this initiative shall not be amended except by a statute that becomes effective only when approved by the electorate.

(b) The provisions of this initiative may be amended only to further its purposes, by a statute passed in each house of the Legislature by roll call vote entered in the journal, two-thirds of the membership of each house concurring. In any judicial action with respect to such amendment, the court shall exercise its independent judgment as to whether or not the amendment satisfies the requirements of this subdivision.

SECTION NINE. If any provision of this act or application thereof to any person or circumstance is held invalid, that invalidity shall not affect other provisions or applications of the act which can be given effect without the invalid provision or application, and to this end the provisions of this act are severable.

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