Court Schedules Briefing in Pending Challenge to Fee-Shifting Bylaw

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Oct. 8 — During an Oct. 7 teleconference, Chancellor Andre G. Bouchard agreed to determine issues regarding the applicability of a fee-shifting bylaw before any other matters in a class action lawsuit pending before the Delaware Chancery Court, according to attorneys for both parties.

The plaintiff's challenge to First Aviation Services, Inc's bylaw could be the first test of the Delaware Supreme Court's ATP Tour decision endorsing the conceptual validity of “loser-pays” bylaws.

The plaintiff is challenging both the applicability of the bylaw, as well as its scope. The court also authorized the parties to conduct discovery to support briefing on the matter.

According to Sidney Liebesman, Montgomery McCracken Walker & Rhoads LLP, who is representing the plaintiff, all briefing on the bylaw challenge should be completed by January; the plaintiff expects to submit his initial brief in early December.

Bylaw Applicability?

In Strougo v. Hollander, the plaintiff filed an Sept. 24 amended class action complaint, which included a challenge to First Aviation's bylaw that would allow the company to recoup litigation expenses from the plaintiff if he is unsuccessful in his lawsuit.

According to the complaint, “the Bylaw imposes an obligation on Plaintiff to pay ‘for all fees, costs, and expenses of every kind and description' incurred by defendants if Plaintiff fails to ‘obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought.'”

This challenge came just more than a week after another company, faced with a lawsuit in the Delaware Chancery Court, elected not to pursue a fee-shifting bylaw it had enacted in the wake of ATP Tour.

According to the amended complaint in Strougo, First Aviation adopted a fee-shifting provision in its bylaws “mere weeks” after it publicly announced a reverse share split in the company's common stock, which underlies the class action, and the bylaw was not voted on by the stockholders. Additionally, the plaintiff asserted that he only learned of the bylaw after he filed the class action complaint.

The plaintiff alleges that the provision “was adopted with the goal of stifling litigation arising out of the Transaction” and “imposes an impossibly high standard of success.” The amended complaint further states that “it is a flagrant violation of Delaware public policy to adopt a fee-shifting provision on the heels of a major corporate change.”

Gustavo F. Bruckner, Pomerantz LLP, who also is representing the plaintiff, told Bloomberg BNA that “while our client believes this action is meritorious we cannot ignore the tremendous financial liability that is potentially faced here even if we succeed on most but not all of his claims.”

‘ATP Tour'

Responding to a certified question in May in ATP Tour Inc. v. Deutscher Tennis Bund, the Delaware Supreme Court found that fee-shifting provisions in the bylaws of a Delaware non-stock corporation, which would allow the company to recoup litigation expense from unsuccessful plaintiffs, can be enforceable.

The decision set off a flurry of legislative activity and reactions among the corporate community; recent estimates have the number of companies who have adopted such provisions since ATP Tour at 18.

Delaware State Sen. Bryan Townsend (D-Newark) sponsored a bill that would prohibit Delaware companies from adopting “loser pays” bylaws. However, Townsend in June tabled debate on the matter to hear from business interests. Accordingly, the Delaware General Assembly will not decide until 2015 whether to amend the state's General Corporation Law to restrict these bylaws..

On Oct. 9, the Securities and Exchange Commission's Investor Advisory Committee (IAC) planned to discuss companies' adoption of fee-shifting bylaws relating to intra-company litigation.

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To contact the editor responsible for this story: Ryan Tuck at

A link to the amended complaint in Strougo is available at