Fee Shifting Bylaws in Delaware: The Facts on the Ground (Part 1)

In ATP Tour, Inc. v. Deutscher Tennis Bund the Delaware Supreme Court upheld a very broad bylaw that allowed for the shifting of fees in the context of a non-stock company.  

Although a non-stock company, it did not take long before the bylaws began to appear in the context of for-profit stock corporations. The case came out in May. By July, companies were adopting the bylaws. As a memorandum from Wachtell back in July described: 

• To date, we are aware of two Delaware corporations that have adopted fee-shifting bylaws applicable to stockholders. One (The LGL Group, Inc.) adopted its bylaw a week before the Delaware State Senate passed Joint Resolution #12, and another (Echo Therapeutics, Inc.) did so a few days after the Senate acted. In addition, another company (Townsquare Media, LLC) has filed a preliminary registration statement with the Securities and Exchange Commission, indicating that it is considering including a fee-shifting provision in the certificate of incorporation it plans to adopt when it converts into a Delaware corporation in connection with its pending initial public offering. 

Since then the numbers have increased, with around a dozen or so companies (some of which are partnerships) adopting these types of provisions.    

The bylaws are, typically, broadly drafted. They apply not only to current or prior stockholders but also anyone who joins, offers substantial assistance to, or has a direct financial interest in, any claim. Likewise, they do not shift fees only upon a dismissal. Instead, the fee shifting provision typically applies to anyone who fails to obtain "a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought." Thus, shareholders do not have to avoid dismissal to avoid paying fees; they have to win the case.  

They also are not typically limited to cases involving fiduciary duties or other claims that can be characterized as matters of "internal affairs." Instead, it applies to any claim (by a shareholder/former shareholder). Presumably, therefore, the language sweeps in causes of action under the federal securities laws.  

Where fees shift, shareholders are "obligated jointly and severally to reimburse the Company and all such directors, officers, or employees for all fees, costs and expenses of every kind and description."

As one company described: 

• The principal amendments to the Bylaws provide for the shifting of litigation expenses in intra-company litigation, to the fullest extent permitted by law, to an unsuccessful plaintiff who does not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought, and that a plaintiff in such litigation is required to pay all of its own litigation expenses, as well as all fees, costs and expenses of the Company’s directors, officers or employees, and will not be entitled to recover such litigation expenses from the Company, regardless of whether the plaintiff is successful. 

See Current Report, Portfolio Recovery Associates, July 31, 2014. The bylaw is here.  

Nonetheless, variations are beginning to develop. We'll look at some of the attributes in the next post. We'll also look at the one case, so far, that involves a challenge to a fee shifting bylaw.