May 21, 2014
Fee-Shifting Bylaws: In Case Nothing Else Will Deter Plaintiffs Shareholder Suits
Posted by Christine Hurt

Earlier in May, the Delaware Supreme Court decided a certified question from the District of Delaware as to whether a Delaware corporation could adopt a bylaw whereby any member in a nonstock corporation would pay legal fees of the corporation if it instituted litigation against it and was not wholly successful.  As you might have guessed, the answer was yes, and this also applies to any Delaware corporation.  Here are Kevin LaCroix at D&O Diary and the HLS Forum with the gory factual details.  A few humble thoughts to add to the mix:

What sorts of companies will adopt these loser-pays bylaws?  Presumably, shareholders could balk, particularly if the director-amended bylaws can be amended by shareholder consent.  Companies might believe that this additional deterrent is unnecessary given 102(b)(7) carveouts and simply abstain.  Or, companies might believe it to be a costless measure that adds an incremental deterrent factor, particularly in merger litigation.  Considering the flood of 102(b)(7) charter amendment provisions, a tidal wave of fee-shifting bylaws might not be surprising.

Are these bylaws always permissible?  the opinion said that the bylaws were facially valid, but might be impermissible given the circumstances.  Which circumstances?  I can imagine a Blasius-like circumstance in which a shareholder group is in the middle of a tender offer or a proxy fight and threatening to seek an injunction and the board adopts a fee-shifting amendment.  Can the bylaw apply to litigation concerning subject matter that happened prior to the bylaw adoption?  It also seems a bit unseemly that such a provision could be used to deter litigation over self-dealing or conflicts of interest.

What about multi-jurisdictional litigaton?  Say a shareholder (ok, a plaintiff's lawyer) files a shareholder suit in jurisdiction 1 and attempts to stay identical litigation in jurisdiction 2.  The case proceeds in jurisdiction 2, but is dismissed in jurisdiction 1.  Does the shareholder have to pay costs of the defendant to dismiss in jurisdiction 1?  That would be interesting and definitely change incentives.

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