On May 8, 2014, the Delaware Supreme Court ruled on a question of law posed by a United States District Court that so-called fee-shifting bylaw provisions are permissible under Delaware law. These types of provisions require a stockholder suing a Delaware corporation to pay for the corporation’s legal fees if the stockholder loses the suit.
In general, Delaware follows the American Rule that requires each party to a litigation to pay its own attorneys’ fees and costs. However, in ATP Tour, Inc. et al. v. Deutscher Tennis Bund et al., the Court observed that it is long settled law that contracting parties may agree to modify the American Rule and obligate the losing party to pay the prevailing parties’ fees. It further stated that bylaws are contracts among a corporation’s shareholders. Therefore, a fee-shifting bylaw would not be prohibited under Delaware law.
The Court added that the enforceability of a fee-shifting bylaw depends on the manner in which it was adopted and the circumstances under which it was invoked. Bylaws that may otherwise be facially valid will not be enforced if adopted or used for an inequitable purpose. This may occur for example when the purpose of the provision is to obstruct the legitimate efforts of a shareholder to call a corporation to task for its actions. Think adoption of the bylaw after a shareholder’s suit has been commenced.
The effect of the ruling is subject to debate. Some regard the ruling as having a potentially negative impact on shareholders’ rights because it will cause shareholders to think twice before challenging corporate misconduct out of concern that they may have to pay the corporation's legal bills. Others believe that companies will be reluctant to adopt a fee-shifting provision as it will cause prospective investors to stay away from a company that curtails their rights. See the Wall Street Journal’s article for a neat summary of the pros and cons of the Court’s decision.
It appears to me that the Court merely built on long settled law that previously validated such bylaw provisions as choosing the Delaware courts as the exclusive forum for disgruntled stockholders who want to bring an action against the corporation.
In general, Delaware follows the American Rule that requires each party to a litigation to pay its own attorneys’ fees and costs. However, in ATP Tour, Inc. et al. v. Deutscher Tennis Bund et al., the Court observed that it is long settled law that contracting parties may agree to modify the American Rule and obligate the losing party to pay the prevailing parties’ fees. It further stated that bylaws are contracts among a corporation’s shareholders. Therefore, a fee-shifting bylaw would not be prohibited under Delaware law.
The Court added that the enforceability of a fee-shifting bylaw depends on the manner in which it was adopted and the circumstances under which it was invoked. Bylaws that may otherwise be facially valid will not be enforced if adopted or used for an inequitable purpose. This may occur for example when the purpose of the provision is to obstruct the legitimate efforts of a shareholder to call a corporation to task for its actions. Think adoption of the bylaw after a shareholder’s suit has been commenced.
The effect of the ruling is subject to debate. Some regard the ruling as having a potentially negative impact on shareholders’ rights because it will cause shareholders to think twice before challenging corporate misconduct out of concern that they may have to pay the corporation's legal bills. Others believe that companies will be reluctant to adopt a fee-shifting provision as it will cause prospective investors to stay away from a company that curtails their rights. See the Wall Street Journal’s article for a neat summary of the pros and cons of the Court’s decision.
It appears to me that the Court merely built on long settled law that previously validated such bylaw provisions as choosing the Delaware courts as the exclusive forum for disgruntled stockholders who want to bring an action against the corporation.
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