Should the contingency-fee plaintiffs' firms — whose economic interest is in fee awards, not in shareholder wealth — be regarded as internal participants in the principal-agent chain, or as external actors operating on the corporation from the outside?
Some scholars argue that "alpha activist" plaintiffs' firms function as quasi-internal corporate governance actors because they identify cases that mainstream investors ignore, finance the litigation, and discipline boards that other shareholders cannot effectively reach.5 On this view, contingency-fee firms supply a private enforcement function that the classical model formally assigns to shareholders themselves and that index-fund-dominated capital markets are structurally unwilling to perform.
A contrasting view, advanced by the author below, is that the legal-economic identity of contingency-fee firms is irreducibly external to the corporation. Their economic interest is in fee awards, not in stockholder wealth.6 The most prominent recent example: in In re Dell Technologies Inc. Class V Stockholders Litigation, the Court of Chancery awarded class counsel $266.7 million in attorneys' fees — 26.67% of the $1 billion settlement and approximately 62× counsel's documented lodestar of roughly $4.28 million.7 The Delaware Supreme Court affirmed en banc on August 14, 2024. The fee award alone is larger than the total market capitalization of many public companies tracked by this Initiative's Reincorporation Index.
| Dimension | Classical fiduciary model (board · officers · shareholders) | Contingency-fee enforcement bar (private plaintiffs' firms) |
|---|---|---|
| Classical Source of authority | Statute (DGCL · TBOC) and corporate charter; fiduciary duties at common law | Court-conferred derivative-suit standing and counsel-of-record status |
| Classical Economic interest | Aligned with residual claim (board) or share value (shareholders) | Fee award (typically percentage of recovery, sometimes lodestar multiple) |
| Classical Accountability | Election, fiduciary suit, market for corporate control | Court approval of fees, professional-responsibility rules, reputational market |
| Contingency-fee Selects the case | Board strategy committee or shareholder demand | Counsel screening (volume firms file thousands of pre-suit demand letters per year) |
| Contingency-fee Finances the litigation | Corporation (advance + indemnification under DGCL § 145 / TBOC § 8.101) | Counsel finances on contingency (own capital or litigation-finance partners) |
| Contingency-fee Captures the surplus | Shareholders pro-rata (per shares held) | Counsel (Sugarland percentage); remainder to class members pro-rata |
The Texas legislature has addressed the resulting incentive structure directly. Texas Senate Bill 29 (89th Leg., R.S. 2025), which became effective May 14, 2025, codified an ownership threshold for derivative-suit standing: a shareholder bringing a derivative proceeding must hold at least 3% of outstanding voting shares, but only if the corporation has opted in to that threshold by charter or bylaw amendment. The 3% is the statutory maximum the corporation may impose; the threshold does not apply by default.8 The threshold appears to have been first enforced in federal court on March 17, 2026 in Gusinsky v. Reynolds, in which Judge Kinkeade is reported to have dismissed the derivative complaint against Southwest Airlines because the named shareholder held 100 shares — far below the 3% threshold — and the bylaw was held to apply at the time the proceeding was instituted, not at the time of the pre-suit demand letter. The memorandum opinion has since been widely analyzed by major firm advisories (Gibson Dunn, Foley & Lardner, DLA Piper, Sidley, A&O Shearman) confirming the dismissal turned on the 3% threshold being measured at the moment of complaint filing, not at demand.9
Eight Tier-1 EDGAR-verified Texas-incumbent companies have adopted the § 21.552 threshold by standalone bylaw amendment (Southwest Airlines, HeartSciences, South Plains Financial, Service Corporation, CenterPoint Energy, Legacy Housing, Caris Life Sciences, and Rush Enterprises), and seven migrators elected the § 21.552 threshold on the way to Texas (Tesla, Dillard's, Eightco, Forward Industries, United States Antimony, Coinbase, and TTEC) — fifteen firms operating under a § 21.552 derivative-standing election (the statute caps the electable threshold at 3% of outstanding shares), with ArcBest's single-share election and International Bancshares' since-rescinded adoption rounding out seventeen roster entries. The representative cards below show five; the full roster, per-firm bylaw language, and EDGAR primary sources are tracked on the Texas Companies page.
The author's analytic view, set out here as a scholarly position rather than an institutional one, is that the contingency-fee plaintiffs' bar is external to the principal-agent chain. It supplies an enforcement service to the corporate-governance ecosystem, but its claim to membership in that chain depends on a counter-factual: but for contingency-fee firms, would shareholders be able to hold boards accountable through derivative action? On the current data — index-fund managers do not litigate; activist hedge funds occasionally bring cases but at modest scale — the answer is empirically yes, the enforcement function would diminish. The policy question is whether that diminution is acceptable in exchange for narrower agency costs in the fee channel itself. The Texas legislative answer is the 3% threshold of SB 29; the Delaware answer is closer attention to fee proportions under Sugarland.10