Fee-Shifting and Shareholder Litigation

53 Pages Posted: 20 Sep 2016 Last revised: 8 Jun 2021

See all articles by Albert H. Choi

Albert H. Choi

University of Michigan Law School; European Corporate Governance Institute (ECGI)

Date Written: March 12, 2018


A fee-shifting provision, in a 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 such a 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 Article first makes a theoretical claim that the optimal fee-shifting arrangement lies somewhere between the pro-defendant version adopted by the corporations and the no-fee-shifting version mandated by the Delaware legislature. A more balanced fee-shifting provision will do better in encouraging meritorious lawsuits while discouraging nonmeritorious 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 Article 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 Article finally argues that, instead of a categorical ban, the law should allow fee-shifting provisions in charters and bylaws but subject them to 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.

Suggested Citation

Choi, Albert H., Fee-Shifting and Shareholder Litigation (March 12, 2018). 104:1 Virginia Law Review 59 (2018), Virginia Law and Economics Research Paper No. 2016-15, Available at SSRN: https://ssrn.com/abstract=2840947 or http://dx.doi.org/10.2139/ssrn.2840947

Albert H. Choi (Contact Author)

University of Michigan Law School ( email )

625 South State Street
Ann Arbor, MI 48109-1215
United States

HOME PAGE: http://www.law.umich.edu/FacultyBio/Pages/FacultyBio.aspx?FacID=alchoi

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

HOME PAGE: http://ecgi.global/users/albert-h-choi

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