Fee Shifting: Delaware's Self-Inflicted Wound

40 Delaware Journal of Corporate Law 851 (2016)

UCLA School of Law, Law-Econ Research Paper No. 15-10

22 Pages Posted: 30 Jun 2015 Last revised: 27 May 2016

Stephen M. Bainbridge

University of California, Los Angeles (UCLA) - School of Law

Date Written: 2015

Abstract

In a 2014 opinion (ATP Tour, Inc. v. Deutscher Tennis Bund), the Delaware Supreme Court upheld a fee-shifting bylaw, which required unsuccessful shareholder litigants in either derivative or direct actions to reimburse the corporation for its legal expenses. Although the entity in question was a non-profit, non-stock corporation, most observers expected the Delaware courts to extend that holding to for-profit stock corporations. In the months that followed, about 50 Delaware corporations adopted such bylaws.

In its 2015 legislative session, however, the Delaware legislature adopted amendments to the Delaware General Corporation Law (S.B. 75) that effectively bans such bylaws. This article argues that this ban is contrary to sound public policy and adverse to Delaware’s own interests. It then advances an interest group analysis, focusing on the power of the Delaware bar, to explain why the Delaware legislature would have inflicted such a serious wound on itself.

This analysis leads to two take-home lessons. First, if it wishes to ensure that future legislation advances both sound public policy and the state’s financial interests, the Delaware legislature needs to free itself from the bar’s influence. In addition, the business community needs to invest lobbying resources in Delaware so as to counter the bar’s influence in cases such as this. Second, states in which the corporate bar wields less legislative influence thus may have a significantly easier time adopting legislation authorizing such bylaws. If so, the likelihood that S.B. 75 will significantly reduce Delaware’s dominance of corporate law will go up substantially.

Keywords: attorneys’ fees, bylaws, articles of incorporation, lawyers, Delaware

JEL Classification: K22

Suggested Citation

Bainbridge, Stephen M., Fee Shifting: Delaware's Self-Inflicted Wound (2015). 40 Delaware Journal of Corporate Law 851 (2016); UCLA School of Law, Law-Econ Research Paper No. 15-10. Available at SSRN: https://ssrn.com/abstract=2624750

Stephen Mark Bainbridge (Contact Author)

University of California, Los Angeles (UCLA) - School of Law ( email )

385 Charles E. Young Dr. East
Room 1242
Los Angeles, CA 90095-1476
United States
310-206-1599 (Phone)
310-825-6023 (Fax)

HOME PAGE: http://www.professorbainbridge.com

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