May 13, 2014

Delaware Supreme Court Finds Fee-Shifting Bylaws Permissible

Here’s news from Paul Weiss (memos on this case are posted in the “Securities Litigation” Practice Area):

In an opinion that may dramatically change the landscape of stockholder litigation, the Delaware Supreme Court upheld – in ATP Tour, Inc. v. Deutscher Tennis Bund – a fee-shifting by-law that required plaintiffs to bear the costs of intra-corporate litigation if the plaintiffs were not successful on the merits or did not achieve “in substance and amount, the full remedy sought.”

In finding that the bylaw was permissible as a matter of law, the court held that “[n]either the DGCL nor any other Delaware statute forbids the enactment of fee-shifting bylaws” and “[m]oreover, no principle of common law prohibits directors from enacting fee-shifting bylaws.” This conclusion follows from the fact that bylaws are a form of contract and that fee-shifting is a well-settled contractual device for allocating risk. The court notes that the adoption and application of such a fee-shifting bylaw must comply with a board’s fiduciary duties, but if the board so complies, such bylaws are facially permissible and enforceable, even for the purpose of deterring litigation. As the court holds, “[f]ee-shifting provisions, by their nature, deter litigation. Because fee-shifting provisions are not per se invalid, an intent to deter litigation would not necessarily render the bylaw unenforceable in equity.”

The opinion addresses a bylaw put in place in the context of a non-stock corporation, but the holding may be read to apply to all Delaware corporations. Whether such a bylaw is appropriate for a particular corporation, will, however, depend on a number of factors specific to such corporation and care should be taken in connection with an adoption of such a bylaw. Because this is the first case addressing fee-shifting bylaws, the reaction of proxy advisory firms and other interested parties in the corporate governance arena is yet to be known. Further, the court was careful to note that such a bylaw may be facially valid, but nevertheless be invalid if adopted or used for an inequitable purpose.

Conflict Minerals: A Second Form SD Filed

Yesterday, Affymetrix became the 2nd company to file a Form SD – see some analysis from Steve Quinlivan and analysis from Elm Consulting. Here’s my blog about the first…

More on our “Proxy Season Blog”

We continue to post new items regularly on our “Proxy Season Blog” for members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

– Shareholder Proposals: Trends for the Season & How to Keep Track
– Declassification: 75% of ’14 Engagements Have Already Produced Agreements
– Increasing Use of Nonbinding Shareholder Proposals to Seek Divestitures
– Will Corp Fin Start Objecting to Too Many 10-Q Risk Factors?
– Cere’s Climate Change Disclosure Campaign Continues
– Not Counting “Abstentions”: A Rebuttal

– Broc Romanek