Delaware Corporation Decides Not to Pursue Applicability of Fee-Shifting Bylaw

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By Michael Greene

Sept. 17 — Hemispherx Biopharma, Inc. has elected not to seek enforcement of its fee-shifting bylaw in an ongoing Delaware Chancery Court case, which could have been the first test of the actual validity of such a provision.

Defendants notified the court of their decision in a Sept. 16 letter. During a Sept. 12 conference, Chancellor Andre G. Bouchard had ordered Hemispherx to clarify how it sought to apply its fee-shifting bylaw.

‘ATP Tour' and Aftermath

Responding to a certified question in May in ATP Tour Inc. v. Deutscher Tennis Bund, the Delaware Supreme Court endorsed the conceptual validity of 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.

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

In a statement e-mailed to Bloomberg BNA, Lawrence A. Hamermesh, a professor at Widener University School of Law in Wilmington, Del., noted that during the Sept. 12 conference, “counsel for plaintiff somewhat wistfully asked, at the conclusion of the hearing,” if the parties decide not to dispute the bylaw issue in this case “whether that leaves the bylaw in place as a deterrent to other shareholder litigation, and the Court's response, appropriately enough, was that ‘somebody is going to decide if they have the stomach in an independent case to challenge one of these bylaws.'”

When asked whether the outcome of this case provides any insight on the future enforceability of fee-shifting bylaws, Hamermesh said, “it's not clear whether or when there ever will be such a challenge or an opportunity for the courts to speak on the subject. Could be next month, or could be years from now.”

When contacted by Bloomberg BNA, M. Duncan Grant, an attorney for Pepper Hamilton, LLP, who is representing the defendants, declined to comment on his clients' decision.

Fluid Situation

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 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. On Aug. 15, Chancellor Bouchard held a scheduling conference concerning the bylaw amendment. The court 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 and requested that the court address a separate motion by the company's special litigation committee prior to addressing any challenges to the bylaw.

Defendants argued that if they were successful in their SLC motion, it would immediately end the case and they would not seek to enforce the fee-shifting bylaw to any portion of this case.

In response to these motions, the court held a conference on Sept. 12 to make things clearer then they were from the “very fluid” Aug. 15 hearing.

Sept. 12 Conference

At the conference, Chancellor Bouchard ordered the defendants to make a “firm decision” on whether they are seeking to enforce a fee-shifting bylaw to this case and “[n]ot just to the next phase of this case but to this case, period.”

Additionally, he determined that the bylaw issue must be resolved before any other issues in this case.

Chancellor Bouchard reasoned, “I know the company contends that it was really more motivated [in enacting the bylaw] by other securities claims. I can't get to the bottom of whether that's the case or not. But the company made a decision in the middle of this litigation to enact its bylaw, and it has consequences.”

He further opined that it is not fair to put plaintiffs in a position of “having a cloud hang over decisions they make today when, knowing down the road, the bylaw could potentially still have some application.”

Different Reactions

The Supreme Court's ATP Tour holding has resulted in a wave of different reactions. And there still seems to be uncertainty as to 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.

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

In a statement e-mailed to BBNA Sept. 12, Michael Hanrahan, an attorney for Prickett, Jones & Elliott, P.A. representing the plaintiffs, stated, “ [t]here are now at least 18 entities that have adopted fee-shifting provisions, including some limited partnerships, limited liability companies and several non-Delaware corporations.”

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A link to the defendants' letter is available at