Delaware Supreme Court's Chief Justice Voices Support for Fee-Shifting Limitation

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By Michael Greene

March 31 — Delaware Supreme Court Chief Justice Leo E. Strine Jr. supports the Delaware State Bar's Corporation Law Council proposal that would invalidate fee-shifting bylaws and charters that allow stock corporations to recoup litigation expenses from unsuccessful plaintiffs.

“I worry about the courts picking and choosing [which types of bylaws are appropriate],” he said March 30 during the Council of Institutional Investor's spring 2015 conference. “I don't worry about our General Assembly picking and choosing because they are ones who are elected to do this.”

He said that when the market innovates in a way that is believed to be counterproductive, it is “perfectly reasonable” for the legislature to act.

Strine also addressed concerns about the effect the proposal will have on federal securities litigation, as well as the council's other proposal related to exclusive forum selection bylaws—rejecting the criticism that it is designed to benefit lawyers.

‘ATP Tour' and Aftermath

The council's proposal to invalidate “loser pays” bylaws was provoked in large part by the Delaware Supreme Court's May 2014 decision in ATP Tour Inc. v. Deutscher Tennis Bund, which found that fee-shifting provisions in the bylaws of a Delaware non-stock corporation can be enforceable.

Since ATP Tour, both plaintiffs' firms and academics have raised concerns over whether such provisions would effectively deter all stockholder litigation. That debate has been fueled by almost 40 companies enacting provisions by early 2015, according to research by Claudia H. Allen, a partner and co-chair of the corporate governance practice at Katten Muchin Rosenman LLP.

The facial validity of a fee-shifting provision has not yet been tested by a Delaware court. Earlier this month, the chancery court sidestepped arguments about the general validity of a post-ATP Tour fee-shifting bylaw and found it unenforceable based on the timing of its enactment.

Public v. Non-Public Corporations

The ATP Tour decision may have had some unexpected consequences, Chief Justice Strine said at the CII conference.

The high court's decision caught the corporate community by surprise partially because it was made in response to a certified question, he said. There may have been ill-advised rush by some companies to react to this decision.

The court concluded that the fee-shifting bylaw in ATP Tour dealt with internal affairs and was consistent with the statute, he said. “We didn’t say it was smart for public companies to adopt these provisions.”

Strine noted that there is not a separate Delaware General Corporation Law for stock and non-stock corporations, nor is there one that distinguishes between public and non-public corporations.

“I never contemplated fee-shifting in a public company context. It is something that never really occurred to me,” he said.

While Strine said that in the context of member corporations a fee-shifting provision could make a lot of sense, such provisions do not make sense for public companies to adopt.

Federal Securities Litigation

Chief Justice Strine also discussed concerns that the Bar council's proposal would not preclude companies from adopting fee-shifting provisions in the context of federal securities litigation.

According to a recent article by John C. “Jack” Coffee, Jr., a professor at Columbia Law School and director of the school's Center on Corporate Governance, because the proposal only bars fee-shifting bylaws and charters “in connection with an intracorporate claim,” the new legislation could be read not to apply to certain types of federal securities class actions.

“I would imagine that was more of a question of Delaware being modest,” Strine said, adding that regulating the internal affairs of a corporation really is Delaware's domain.

He added that there are federal supremacy issues regarding fee-shifting in securities claims and that he didn't believe that anyone contemplated that Delaware could enable fee-shifting in this context if it's prohibited under federal securities laws.

Forum Selection Bylaws

In addition to the fee-shifting limitation, the council's proposal also included an amendment that endorses Delaware exclusive forum selection provisions.

According to Strine, this is a good subject for private enforcement. “There's a lot of good stuff that has come out of institutional investor litigation, but there has been a trend towards a lot of cost,” he said.

The reality is if a company is sued in three different states, the cost of buying off the plaintiff's lawyers is cheaper, even in meritless lawsuits, than trying to get three different system to dismiss the case, he said.

Strine said that ultimately, forum selection clauses can help align the cost-benefit ratio of litigation so that only lawsuits of real value are brought.

Litigation Grab

Strine also addressed concerns about the council's motivation for the proposal.

The council's proposal would preclude Delaware corporations from adopting such provisions if they prevent litigating claims in Delaware courts, which overturns the Delaware Chancery Court's recent ruling in City of Providence v. First Citizens BancShares Inc.

Some people think that Delaware is “out to grab litigation,” but that is not the motivation, he said.

“The concern is that if you let corporate management select a forum like their state of headquarters, political and other considerations could be a driving factor in the litigation,” he said, adding that such a situation could be adverse to the cost-benefit ratio of litigation because meritorious lawsuits, where management should be held accountable, will not be brought because the forum would be seen as hostile.

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

The fee-shifting and forum selection proposal is available at