Corporate Law

Amid battle over bill banning fee-shifting bylaws in Delaware, legal experts point to loophole

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Among a number of proposed changes in Delaware corporate law, a bill that would ban companies from enacting fee-shifting bylaws is the most controversial.

Authorized by a state supreme court decision last year, such bylaws, if they are widely adopted, potentially could significantly curtail shareholder derivative litigation in the state by requiring the losing party to cover the attorney’s fees and costs for both sides, according to the DealBook page of the New York Times (reg. req.).

Proposed legislation that would ban such bylaws is largely supported by attorneys who practice in Delaware and opposed by the U.S. Chamber of Commerce, so its enactment is by no means a certainty. Even if such bylaws are banned, a significant loophole may still exist, legal experts say.

A Delaware Corporate & Commercial Litigation Blog post provides details about the proposed legislation.

“Even with a battle brewing, no one seems to have read the statute closely,” writes John Coffee in the CLS Blue Sky Blog. It covers only “intracorporate” litigation, such as derivative claims and breach of fiduciary duty cases, he points out. Federal securities class actions, which require only a material misstatement, are excluded.

Possibly, the U.S. Securities and Exchange Commission would step in to address that omission if the legislation is enacted in its current form, writes Cydney Posner of Cooley in a Lexology post..

Related coverage:

ABAJournal.com: “New bill could nix top Delaware court’s OK of loser-pays rule for attorney fees in corporate cases”

ABAJournal.com: “Plaintiffs lawyers fight ‘loser-pays’ bylaw adopted in middle of shareholder suit”

Reuters: “Big pension funds mobilize against Delaware fee-shifting clauses”

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