Paradigm Shift? The Delaware Supreme Court Allows Bylaw That Shifts Attorneys’ Fees to Loser in Fiduciary Duty Litigation

Under the prevailing “American rule,” shareholders and their counsel face little financial risk when they assert claims against directors and officers for breaches of fiduciary duty, typically following the announcement of a significant corporate transaction or disappointing corporate news. Winning plaintiffs (or at least their counsel) can get big paydays. Losers usually move on, having only lost some time and their own costs. That paradigm may begin to shift, however, after the Delaware Supreme Court’s recent ruling in ATP Tour, Inc. v. Deutscher Tennis Bund, No. 534, 2013 (Del. May 8, 2014).

In ATP, the court ruled that Delaware law does not prevent the board of a Delaware non-stock corporation from enacting a fee-shifting bylaw that would require the unsuccessful plaintiff in intra-corporate litigation (including purported class action fiduciary duty claims) to pay the corporate defendants’ litigation costs, including attorneys’ fees. While typical stock corporations have not adopted fee-shifting bylaws similar to the one at issue in ATP, the ruling may pave the way for adoption and enforcement of similar fee-shifting bylaw provisions. That could force shareholders to carefully weigh the costs and benefits of litigating fiduciary duty claims.

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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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