John C. Coffee, Jr.

Fee-Shifting Bylaws: Race to the Bottom?

John C. Coffee, Jr.

John C. Coffee, Jr.

On May 8, 2014, the Delaware Supreme Court issued an opinion in ATP Tour, Inc. v. Deutscher Tennis Bund (German Tennis Federation), No. 534, 2013 (Del. May 8, 2014), holding that fee-shifting provisions in a Delaware non-stock corporation’s bylaws are not per se invalid.

The fee-shifting bylaws at issue shifted all litigation expenses to an unsuccessful plaintiff in intra-corporate litigation who did “not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought.” The court noted it was not deciding whether the specific bylaw at issue was adopted for a proper purpose or enforceable under the circumstances. 

A number of public corporations, Alibaba, soon adopted fee-shifting bylaws or charter provisions that shift the corporation’s costs and expenses in shareholder litigation to the plaintiff shareholder if the latter is unsuccessful (or, in some cases, is less than completely successful).

Delaware may act to bar or limit fee-shifting bylaws, in part out of fear that such bylaws would essentially eliminate one of its leading industries, shareholder litigation. However, even if it does, we can expect a race to the bottom by other states. Columbia Law School Professor John C. Coffee Jr. warns: 

Although the SEC need not oppose all fee-shifting provisions adopted through board or shareholder action, it must be prepared to take on open-ended and more sweeping bylaws—or concede the decline of private enforcement.

Read Coffee’s October 9th testimony before the U.S. Securities and Exchange Commission’s Investor Advisory Committee (SEC-IAC). Yes, there are many shareholder litigation abuses but potentially getting rid of such cases altogether would be crazy – in my opinion.

See also Will the SEC intercede in the battle over fee-shifting bylaws?Fee Shifting Bylaws and the Smart & Final Stores IPO, and Fee Shifting Bylaws in Delaware: The Facts on the Ground (Part 1-8). Counterpoint Rational shareholders should support fee-shifting bylaws and Why The SEC Should Stay Out Of The Fee-Shifting Charter Debate.

For current cases, see Stanford Law’s Securities Class Action Clearinghouse (SCAC).

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