Fee-Shifting and Shareholder Litigation
35 Pages Posted: 20 Sep 2016 Last revised: 1 Sep 2017
Date Written: August 31, 2017
A fee-shifting provision, in corporate charter or bylaws, requires the plaintiff-shareholder to reimburse the litigation expenses of the defendant-corporation when the plaintiff is not successful in litigation. After the Delaware Supreme Court ruled that the provision is enforceable in 2014, a number of corporations adopted fee-shifting bylaws, utilizing the directors’ right to unilaterally amend bylaws without express shareholder approval. In 2015, the Delaware legislature reversed course by prohibiting fee-shifting provisions in both charters and bylaws. This back-and-forth history has left an important question unanswered. Should fee-shifting be allowed in shareholder litigation and, if so, in what form? This paper first makes a theoretical claim that the optimal fee-shifting arrangement lies somewhere between the pro-defendant version adopted by the corporations and no fee-shifting mandated by the Delaware legislature. A more balanced fee-shifting provision will do better in encouraging meritorious lawsuits while discouraging non-meritorious ones, especially with respect to direct shareholder lawsuits. For derivative lawsuits, a balanced fee-shifting rule will impose a higher threshold on the merits than the traditional, no-fee-shifting rule. The paper also undertakes an empirical investigation of fee-shifting provisions that are used in commercial agreements, notably stock purchase agreements and bond indentures, that employ more balanced fee-shifting arrangements but with variation. Building upon both the theoretical and empirical analyses, the paper finally argues that, instead of a categorical ban, the law should allow fee-shifting provisions in charters and bylaws but subject them to a more robust judicial oversight. This will better allow the corporations and shareholders to realize the screening benefits of fee-shifting while protecting shareholders’ right to bring suit.
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