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Delaware Chancery Court Faces First Test To Fee-Shifting Bylaw After ‘ATP Tour'

Friday, August 29, 2014

By Michael Greene

Aug. 26 — In what could be the first test of the Delaware Supreme Court's ATP Tour decision endorsing the conceptual validity of fee-shifting bylaws, plaintiffs in a derivative action before the Delaware Court of Chancery requested leave to file an amended complaint Aug. 22 that would include a challenge to such a bylaw.

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 provide that unsuccessful shareholder plaintiffs must pay their adversary's legal fees, can be enforceable.

In Kastis v. Carter, plaintiff stockholders brought a June 2013 derivative action in the chancery court challenging payments made to three current and former Hemispherx Biopharma, Inc. employees. In July 2014, after ATP Tour and while discovery was ongoing, the Hemispherx board adopted a fee-shifting bylaw that would allow the company to recoup litigation expenses from the plaintiffs if they were unsuccessful in their claims.

Plaintiffs responded later in the month by filing a motion to invalidate the bylaw or to dismiss and withdraw counsel. On Aug. 15, Chancellor Andre G. Bouchard held a scheduling conference concerning the bylaw amendment. The court, however, did not issue a ruling during the conference, but instructed plaintiffs' counsel that if they wanted to challenge the bylaw, they should move to amend their complaint.

Plaintiffs filed a motion to do so Aug. 22. Defendants responded that same day by filing a motion for clarification, reconsideration or reargument of the Aug. 15 scheduling conference resolution. Defendants requested the court to address a separate motion by the company's special litigation committee prior to addressing any challenges to the bylaw. Defendants argue that if they are successful in their SLC motion, it would immediately end the case.

In a statement e-mailed to Bloomberg BNA, Lawrence A. Hamermesh, a professor at Widener University School of Law in Wilmington, Del., said he couldn't predict how Chancellor Bouchard would likely rule. However, Hamermesh stated that there were potential outcomes that would avoid any decision on the general validity of such bylaws. “He could conceivably avoid the matter altogether if the defendants agree not to invoke the bylaw in a manner that would affect the litigation that the plaintiff originally brought. Or, he could try to decide the limited question of whether the bylaw was adopted through some improper motive or inequitable purpose. Or, he could decide whether the bylaw would operate unreasonably, as applied to plaintiff's suit,” he said.

Wait on the Legislature?

The Supreme Court's ATP Tour holding has resulted in a wave of different reactions. And there still seems to be uncertainty whether this ruling will lead to a flood of corporations passing fee-shifting bylaws.

Delaware state Sen. Bryan Townsend (D-Newark) sponsored a bill that would prohibit Delaware companies from adopting “loser pays” corporate 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.

When asked whether corporations should wait to see if the legislature adopts the proposed bill, Hamermesh said: “My sense is that client memos from major law firms are recommending the wait and see approach, or at least alerting their clients to the risk that actions on the subject today might be affected by statutory amendments adopted in the next legislative session.”

John Mark Zeberkiewicz, a Richards, Layton & Finger P.A. director in Wilmington, Del. and co-author of Bloomberg BNA's Delaware Nonstock Corporations portfolio, told Bloomberg BNA earlier this year that before the General Assembly's regular session next year, attorneys must inform their clients that Delaware lawmakers will be studying the issue further and that the legislature could invalidate any fee-shifting bylaws adopted.

In a statement e-mailed to BBNA, Michael Hanrahan, an attorney for Prickett, Jones & Elliott, P.A. representing the plaintiffs, stated, “[i]n just the last 2 months, 15 entities have adopted fee shifting provisions and many of these, including Hemispherx, have also adopted other provisions where the company tries to write the rules for litigation by investors.”

To contact the reporter on this story: Michael Greene in Washington at mgreene@bna.com

To contact the editor on this story: Ryan Tuck at rtuck@bna.com

A transcript of the scheduling conference, plaintiffs' motion for leave to amend and defendants' motion for reargument are available at http://www.bloomberglaw.com/public/document/_CONF_ORD_Kastism_Rena_A_vs_William_A_Carter_Docket_No_8657_Del_C.

 

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