One-sided “Shareholder Pays” Provisions Approved For Corporate Bylaws

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The “American Rule.” To the uninitiated, that name probably conjures up fuzzy feelings of independence. The hardy spirit of our forefathers. Bootstraps and grit. Rocky IV. But to American lawyers, it’s just a rule about attorneys’ fees. In particular, it is the default rule in the United States providing that each party in a lawsuit is responsible for its own attorneys’ fees. To the contrary, the “English Rule” – followed in … England – provides that the losing party in a lawsuit must pay its opponent’s reasonable attorneys’ fees.

The “American Rule” is not without exceptions. It is only the default rule in the absence of a statutory or contractual provision requiring the losing party to pay the winning party’s attorneys’ fees. Contractual fee-shifting provisions, also known as “loser pays” provisions, are common and enforceable in a variety of contractual settings, and they can be an effective risk management tool. Now, in Delaware, business entities have an even stronger tool to mitigate the risk of shareholder/member litigation. In ATP Tour, Inc. v. Deutscher Tennis Bund, the Delaware Supreme Court held that boards of non–stock corporations may adopt fee-shifting bylaws requiring a member pursuing litigation against the corporation to pay the corporation’s attorneys’ fees if the member does not obtain a judgment that “substantially achieves, in substance and amount, the full remedy sought” (as long as the provision is not adopted for an improper purpose). 91 A.3d 554, 557-59 (Del. May 8, 2014).

As opposed to a two-way provision that would extend the right to recover attorneys’ fees to either party who loses the lawsuit, the provision approved in ATP Tour, Inc. dramatically shifts the litigation risks to the shareholder/member. The holding has led some commentators to express concerns about a chilling effect that such provisions may have on shareholder/member lawsuits.

Topics:  American Rule, ATP Tours, Attorney's Fees, Bylaws, Delaware General Corporation Law, Shareholder Litigation, Shareholders

Published In: Civil Procedure Updates, Civil Remedies Updates, General Business Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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