Delaware May Level Playing Field With Regard to Fee-Shifting Bylaws

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As discussed here, a recent decision of the Delaware Supreme Court could be a game changer in the world of stockholder litigation. In ATP Tour, Inc. v. Deutscher Tennis Bund (Del. May 8, 2014), the Delaware Supreme Court found that a bylaw containing a fee-shifting provision (i.e., a provision providing that a suing stockholder must pay the corporation’s legal fees and expenses if the stockholder doesn’t obtain a judgment that substantially achieves the full remedy sought) was valid as long as not for an improper purpose, noting that the intent to deter litigation is not necessarily an improper purpose.

In response to the decision in the ATP case, the Delaware State Bar is now considering a proposed amendment to Delaware corporate law that would limit the Delaware Supreme Court’s decision to non-stock corporations. The effect of such a limitation would be that ordinary stock corporations would not be able to take advantage of fee-shifting bylaw provisions. Such a limitation would prevent ordinary corporations from taking advantage of what some believe to be an inappropriate shifting of burden and resulting unfair deterrence of stockholder litigation.

The Delaware General Assembly is expected to have the proposed legislation presented to it prior to June 30 (the end of the current legislative session). If passed, the legislation would become effective August 1, 2014, and again level the playing field in Delaware stockholder litigation.

 

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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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