Attorney Fees

Delaware decision could spur fee-shifting bylaws, putting a damper on shareholder suits

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The Delaware Supreme Court has upheld a fee-shifting provision in a corporate bylaw that might be adopted by other corporations to make shareholder suits more risky.

The May 8 decision (PDF) addressed a federal court’s certified questions about a bylaw adopted by a private company that shifts attorney fees and costs to unsuccessful plaintiffs in intracorporate litigation. The court said such fee-shifting provisions can be valid and enforceable under Delaware law.

The Wall Street Journal (sub. req.) covered the decision and interviewed experts about its implications. Those interviewed said the decision might apply to any company incorporated in Delaware, including public companies, that adopt such bylaws. More than two-thirds of Fortune 500 companies are incorporated in the state.

Fordham University law professor Sean Griffith told the Wall Street Journal that fee-shifting bylaws could help eliminate weak shareholder suits. “This could be a gut check for plaintiffs lawyers,” Griffith said. “They would have to ask—for the first time, really—how good is my case?”

Shareholder lawyer Stuart Grant told the publication that such bylaws could make a shareholder who owns 1 percent of a company’s stock liable for 100 percent of the costs of an unsuccessful suit. “What rational plaintiff is going to bring that case?” Grant said. “This may be a nice way to eliminate nuisance suits, but the baby’s going to go out with the bath water.”

The case is ATP Tour Inc. v. Deutscher Tennis Bund.

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