Are Fee-Shifting Bylaws Really Dead in Delaware?



Delaware may have banned stock corporations in the state from having fee-shifting bylaws, but such provisions are still making an appearance.

One company—payroll-services provider Paylocity Holding Corp.—is defending a bylaw that allows it to recoup litigation expenses when shareholders sue the company outside of Delaware in connection with its internal affairs.

Paylocity’s bylaw was challenged by a shareholder who alleges it is invalid under state law.

Fee-shifting provisions allow companies to recoup their attorneys’ fees and litigation expenses if they win in actions brought by shareholders. Such provisions have split the shareholder and corporate communities. Stockholders see them as infringing upon shareholder rights, while many companies view them as a defense mechanism against frivolous actions.

In response to the controversy, Delaware last August banned bylaw and charter provisions that allow stock corporations to shift fees when shareholders file unsuccessful “intracorporate” claims—lawsuits that involve a company’s internal affairs, such as director conduct.

Despite the ban, there are companies that still have such bylaws on their books. Shareholders this year have sued at least four companies—including Paylocity—for not repealing the provisions. Three of the companies have settled the shareholder claims by agreeing to drop the clauses.

Paylocity, however, is putting up a fierce fight. Among other arguments, the company says its bylaw doesn’t shift fees for bringing unsuccessful claims. Instead, it argues that the clause allows it to recoup litigation costs when a shareholder breaches its exclusive forum selection bylaw.

Exclusive forum selection bylaws, unlike fee-shifting provisions, have been endorsed by the Delaware Legislature.

Should Paylocity prevail, other companies may adopt its bylaw or similar provisions. This is a case worth watching.