Albert H. Choi is Albert C. BeVier Research Professor and Professor of Law at the University of Virginia Law School and Visiting Professor of Law at Columbia Law School. This post is based on a recent paper by Professor Choi. This post is part of the Delaware law series; links to other posts in the series are available here.
After the financial crisis of 2008, there was an explosion of lawsuits by shareholders against their corporations, particularly in mergers and acquisitions transactions. Partly in response to this “flood” of litigation, a number of corporations began devising strategies to deter shareholder lawsuits. One strategy was the fee-shifting bylaw, which would obligate the plaintiff-shareholder to reimburse the corporation’s expenses (including attorneys’ fees and other costs) when the plaintiff is unsuccessful in litigation. Initially, whether the bylaw—adopted unilaterally by the directors and without express shareholder consent—would be honored by the court was uncertain. But that uncertainty was resolved, at least in Delaware, through the case of ATP Tour, Inc. v. Deutscher Tennis Bund (“ATP Tour”). In the case, the Delaware Supreme Court upheld the fee-shifting bylaw adopted by the directors of ATP Tour, Inc., largely by applying the contractarian principle. According to the Court, charters and bylaws constitute a contract between a corporation and its shareholders, and the directors can amend the bylaws by adopting a fee-shifting provision when the amendment right is granted to them in the corporation’s charter. The case generated a substantial amount of controversy, but a number of corporations promptly took advantage of this newly validated right. Only a year later, however, the Delaware legislature took away that right by amending the Delaware General Corporation Law to prohibit altogether fee-shifting provisions, either in the charter or the bylaws.
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