Paylocity Fee-Shifting Bylaw Invalid, Del. Court Says

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By Michael Greene

A stockholder convinced a Delaware judge that cloud-based payroll-services provider Paylocity Holding Corp.'s fee-shifting bylaw is facially invalid under state law ( Solak v. Sarowitz , 2016 BL 431917, Del. Ch., No. 12299-CB, 12/27/16 ).

The Delaware Chancery Court’s Dec. 27 ruling is the first to interpret a state law that bars stock corporations from adopting bylaw and charter provisions that shift litigation fees to shareholders who file unsuccessful claims over the company’s internal affairs. The decision suggests that Delaware courts will read the statute broadly.

Paylocity’s bylaw was adopted six months after the Delaware law went into effect in 2015. The bylaw allows Paylocity to recoup litigation expenses when a shareholder breaches the company’s forum-selection clause by suing it or its officers outside Delaware over corporate matters.

Chancellor Andre G. Bouchard, in denying Paylocity’s motion to dismiss, agreed with stockholder John Solak that the Arlington Heights, Ill.-based company’s bylaw clearly violates the state law by shifting litigation expenses to the shareholder, regardless of where the claim is filed.

Savings Clause

Paylocity’s bylaw wasn’t lawful despite a savings clause that made it enforceable to “the fullest extent permitted by law,” Bouchard said.

The court also determined that Solak’s claims were ripe for review even though no stockholder had triggered Paylocity’s fee-shifting provision by filing a case outside Delaware.

However, the court dismissed Solak’s allegation that Paylocity directors breached their fiduciary duties by approving the bylaw, concluding that the stockholder failed to show the directors acted in bad faith.

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

To contact the editor responsible for this story: Yin Wilczek at ywilczek@bna.com

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