One Way to Fend Off Shareholder Suits: Fee Shifting

One Way to Fend Off Shareholder Suits: Fee Shifting

Want to shift legal fees onto unsuccessful plaintiffs who sued your corporation? There’s a provision for that, kind of. According to Chip Phinney of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, a recent decision from the Delaware Supreme Court has shed light onto the use of corporate bylaws and charters to set some rules and boundaries respecting shareholder litigation of a company’s internal affairs.

In the case of ATP Tour v. Deutscher Tennis Bund, the court held that the company could enact a fee-shifting bylaw that requires an unsuccessful plaintiff to be held liable for the legal fees associated in a case brought by him or her against the corporation or another member of the corporation. Phinney explains that although the company in the case was a nonstock corporation, “there is nothing in the court’s reasoning per se that would bar its application to a stock corporation as well.” He suggests that both boards of private and public companies consider amending bylaws to include similar provisions, “especially those that are contemplating an IPO or otherwise expanding their stock ownership,” he says.

However, for all their safety, Phinney warns that the provisions are still controversial and Delaware is already considering proposals to amend their corporation law to forbid them. “Boards considering them will want to think carefully about the anticipated reactions of institutional shareholders and shareholder representative organizations, which tend to view forum selection provisions with skepticism and will likely regard fee-shifting provisions similarly,” he warns.

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