Paylocity Says Its Fee-Shifting Bylaw OK Under Del. Law

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By Michael Greene

July 20 — Cloud-based payroll-services provider Paylocity Holding Corp. is defending a bylaw that allows the company to recoup litigation expenses when shareholders file certain claims outside Delaware ( Solak v. Sarowitz, Del. Ch., brief filed 7/19/16 ).

Shareholder plaintiff John Solak in May brought a lawsuit in Delaware Chancery Court challenging Paylocity's “fee-shifting” bylaw, saying it's invalid under the state's General Corporation Law.

In August 2015, Delaware banned bylaw and charter provisions that allow stock corporations to shift fees when a shareholder files an unsuccessful “intracorporate claim”—one that involves the company's internal affairs, such as directors' fiduciary duties (13 CARE 1431, 6/26/15).

In a July 19 filing, Paylocity responded that the case should be dismissed because its fee-shifting provision doesn't violate the plain language or legislative intent of the Delaware amendment. The company argued that the provision doesn't shift fees for bringing unsuccessful claims, but instead allows it to recoup litigation expenses when a stockholder breaches the company's exclusive forum selection bylaw.

Corporate bylaw and charter provisions that restrict the litigation rights of shareholders have been a lightning rod for the corporate community. The Paylocity case will be closely watched by other companies that have or are looking to adopt similar provisions.

Peter Andrews, a partner at Andrews & Springer LLC who represents the shareholder plaintiff, told Bloomberg BNA that Paylocity's bylaw is “a clear violation” of Delaware law. The bylaw was “improperly enacted” after the Legislature passed the fee-shifting ban and was an attempt to circumvent the law, he told Bloomberg BNA in an e-mail.

John L. Reed, the partner in charge of DLA Piper LLP's Delaware litigation practice who represents Paylocity, declined to comment on the record.

Shareholder Lawsuits

Shareholders this year have sued at least four companies over fee-shifting provisions (119 CARE, 6/21/16).

Of the cases, only the Paylocity lawsuit remains pending on its merits. At least two of the companies that were sued—StemCells Inc. and Echo Therapeutics Inc.—removed their fee-shifting provisions within a week of the shareholder's lawsuit (86 CARE, 5/4/16).

Unlike the other companies, Paylocity's bylaw—which was adopted six months after the Delaware ban went into effect—only applies when a shareholder brings “extra-forum claims.” In the same bill that restricted fee-shifting, the state Legislature endorsed Delaware exclusive forum selection clauses.

The company asserted in its filing that the plaintiff's lawsuit is “inequitable” because it will help stockholders violate its forum selection clause, which is valid under state law. “Plaintiff comes with ‘unclean hands' and the doors of this court of equity should be closed to him in this instance,” Paylocity said.

The company also argued that the lawsuit isn't ripe for review because there are no allegations that a shareholder has or intends to bring a lawsuit over the company's internal affairs in another jurisdiction.

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

For More Information

Paylocity's brief is available at http://src.bna.com/gW9.

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