Fee Shifting Bylaws

The Delaware Supreme Court upheld on May 8 in ATP Tour v. Deutscher Tennis Bund a corporate bylaw stating that losing plaintiffs of intra-corporate litigation must reimburse the company’s litigation expenses.

The decision may have large repercussions if other firms follow suit because it means that fee-shifting bylaws are generally recognized in Delaware as valid and enforceable—over half of America’s public companies, and 2/3 of the Fortune 500, are incorporated in Delaware. And while shareholder derivative suits are usually settled without a trial, they have been on the rise in recent years and are used by activist shareholders to influence board decisions and management in general.  

Requiring the losing plaintiff to compensate the company’s legal fees makes such lawsuits riskier and more expensive, since the shareholder would only receive a small percentage of the award if he won (proportional to his equity, perhaps .5% or 1% of the company’s stock) but be liable for all litigation costs—his own and that of the company—if he lost.

While it is conceivable that companies may embrace fee-shifting bylaws to deter frivolous lawsuits, since the disproportionate risk would incentivize plaintiffs to carefully consider the merits of their case, doing so may also discourage investment from potential future shareholders who believe they are less able to protect their rights through litigation or its threat. It’s still too early to know the effects of ATP Tour.

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Roger Royse
rroyse@rroyselaw.com

Roger Royse, the founder of the Royse Law Firm, works with companies ranging from newly formed tech startups to publicly traded multinationals in a variety of industries. Roger regularly advises on complex tax structuring, high stakes business negotiations and large international financial transactions. Practicing business and tax law since 1984, Roger’s background includes work with prominent San Francisco Bay area law firms, as well as Milbank, Tweed, Hadley and McCloy in New York City.
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