In Fee-Shifting Bylaw Challenge, Defendants Oppose Limit on Discovery

Bloomberg BNA’s Corporate Law & Accountability Report is available on the Corporate Law Resource Center. This news service keeps corporate practitioners informed of legal developments of...

By Michael Greene

Nov. 12 — Defendants are opposing a proposal to further limit discovery and briefing in an ongoing Delaware Chancery Court lawsuit challenging the applicability of a fee-shifting bylaw.

Plaintiff's counsel sent a Nov. 6 letter to Chancellor Andre G. Bouchard seeking a scheduling conference to determine whether arguments about the timing of the fee-shifting provision can be resolved before any other matters in the case.

Chancellor Bouchard already has agreed to determine issues regarding the applicability of the fee-shifting bylaw before any other matters in the class action lawsuit. Plaintiff's request would further limit the issues that would be decided first.

In response, defendants' attorney, Francis G.X. Pileggi, Eckert Seamans Cherin & Mellott, LLC, Wilmington, Del., sent a Nov. 7 letter to the court opposing this limitation.

The letter states that “[i]nstead of the unusual procedural ‘trifurcation' of this case that plaintiff proposes, plaintiff should be able to present all of his bylaw-related arguments within the bifurcated posture of this case.”

In a Nov. 12 statement e-mailed to Bloomberg BNA, Pileggi said that no conference had yet been scheduled in the case.

Bylaw Issues

In the underlying case, the plaintiff minority stockholder filed a Sept. 24 amended complaint against First Aviation Services, Inc. and its board of directors, alleging breaches of fiduciary duties in approving a reverse share split in the company's common stock.

The amended complaint 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 amended complaint, the company adopted a fee-shifting provision in its bylaws “mere weeks” after the company publicly announced its transaction and the bylaw was not voted on by the stockholders.

The amended complaint further 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.”

Reducing Litigation Expenses

According to the plaintiff's Nov. 6 letter, the defendant has admitted to key allegations regarding when the bylaw was adopted, including that the plaintiff was no longer a stockholder when the bylaw was adopted. He claims that the timing issue is dispositive in determining the bylaw's applicability and plans to file a motion for partial summary judgment on this basis.

The plaintiff, however, seeks to retain his right to pursue all other claims if his motion is denied, such as the breadth of the bylaw.

The letter also noted that the plaintiff's “request is motivated by his precarious position” and that he “seeks to reduce expenses to the minimum amount necessary to adjudicate the fee-shifting provision in order to limit his exposure.”

‘Piecemeal Motion Practice.'

The defendants have refuse to proceed in this manner.

According to the defendants, it is not clear whether the plaintiff's proposal will reduce litigation expenses.

“We have serious doubts about whether piecemeal motion practice on the bylaw amendment would result in a reduction in overall legal fees and expenses,” the letter states.

Accordingly, defendants believe that the proposal is “not an efficient way to proceed” in this case because if the plaintiff loses his motion, the parties will be “engaging in another round of partial summary judgment briefing on the broader issue of the substantive enforceability of the bylaw amendment.”

‘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 can be enforceable. The decision set off a flurry of legislative activity and reactions among the corporate community; experts have estimated that at least 24 companies have adopted one-way bylaws.

Both plaintiffs' firms and academics have raised concerns regarding the impact of such bylaws.

Moreover, in an Oct. 29 letter addressed to SEC Chairman Mary Jo White, Sen. Richard Blumenthal (D-Conn.) criticized ATP Tour.

The Delaware General Assembly is scheduled to take up a bill in January that would prohibit all “loser pays” bylaws.

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

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

The plaintiff's letter is available at http://www.bloomberglaw.com/public/document/CONF_ORD_ON_DISC_Strougo_Robert_vs_Aaron_P_Hollander_Docket_No_97/1.

The defendants' letter is available at http://www.bloomberglaw.com/public/document/CONF_ORD_ON_DISC_Strougo_Robert_vs_Aaron_P_Hollander_Docket_No_97/2.