In Potential Test Case of Fee-Shifting Bylaws, Delaware Court Trifurcates Issues, Discovery

Stay current on changes and developments in corporate law with a wide variety of resources and tools.

By Michael Greene

Dec. 2— Chancellor Andre G. Bouchard has decided to further limit the issues that can be decided first in an ongoing Delaware Chancery Court lawsuit challenging the applicability of a fee-shifting bylaw.

During a Nov. 25 teleconference, he agreed with the plaintiff's proposal to further limit briefing and discovery in this case to focus first on the more-nuanced arguments regarding the timing of the company's adoption of the bylaw.

He said, “[u]nderstanding the dynamics of how these kind of bylaws can be used and potentially misused, I think it's important the plaintiff be given the opportunity to present that discrete issue.”

Briefing will be completed Feb. 13 and oral argument shortly thereafter, said Sidney S. Liebesman, Montgomery McCracken Walker & Rhoads, LLP, Wilmington, Del., who is representing the plaintiff, in a statement e-mailed to BBNA.

This decision comes just more than a month after the court agreed to determine issues regarding the fee-shifting bylaw before any other issue in this case (12 CARE 1300, 10/10/14)—and at a time when eyes beyond Delaware are on this first potential test case of the controversial corporate bylaw.

Bylaw Timing

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 a breach of fiduciary duty (12 CARE 1236, 10/3/14).

The amended complaint included a challenge to a bylaw that would allow First Aviation to recoup litigation expenses from the plaintiff if he is unsuccessful in his lawsuit.

During an Oct. 7 teleconference, Chancellor Bouchard agreed to bifurcate this case so that the court could resolve arguments about the bylaw before the plaintiff's underlying claims.

In a Nov. 6 letter to the court, the plaintiff proposed to further limit the issues that can be decided first in this case (12 CARE 1507, 11/14/14).

In response, defendants' attorney sent a Nov. 7 letter to the court opposing this limitation.

Defendants' Admission

At the Nov. 25 teleconference, Gustavo F. Bruckner, Pomerantz LLP, New York, who also is representing the plaintiff, said that timing issues regarding the bylaw's adoption are dispositive of all other issues surrounding the bylaw.

According to Bruckner, because the defendants admitted in their answer that the plaintiff was no longer a shareholder when the bylaw was adopted, “[t]his tees up the issue very nicely for a motion for partial summary judgment on the pleadings.”

At the teleconference, Bruckner also added that his client's request is fueled by the concern to limit potential financial liability.

Defendant's attorney, Francis G.X. Pileggi, Eckert Seamans Cherin & Mellott, LLC, Wilmington, Del., countered by saying that there is “no per se, invalidity to bylaws amendments that may apply to facts or situations or persons prior to the date of the bylaw amendment.”

He also suggested that the proposed trifurcation would not be the most efficient way to proceed, adding that “there has to some limitation on how many ways we divide up the issues.”

Noting defense counsel's argument, Chancellor Bouchard still agreed to proceed with the plaintiff's proposal.

“[A]ll things being equal, I would prefer to have the whole lay of the land in front of me at one time, and I think there is some efficiency in that,” he said.

“But I am very cognizant of the fact that these fee-shifting bylaws have real potential deterrent effects that people have to take into account, and I think there is a legitimate issue the plaintiffs have raised here that potentially it may be dispositive,” he added.


Thus, Bouchard's ruling could still allow the plaintiff to argue that an equitable exception applies to the bylaw's enforcement if he loses on the challenge regarding the bylaw's adoption.

Bruckner said in statement e-mailed to Bloomberg BNA that “it would be unconscionable to bind a former stockholder to a fee shifting bylaw adopted after the stockholder no longer held any equity interest. That cannot be the law in Delaware or anywhere in the United States.”

He added, “[t]o do otherwise would wreak havoc on the capital markets as it would require stockholders to escrow in perpetuity the proceeds of any stock sale should they be held liable at some unknown date in the future.”

‘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 (12 CARE 529, 5/16/14).

Both plaintiffs' firms and academics have raised concerns regarding the impact of such bylaws, which an estimated 35 companies have adopted (12 CARE 1390, 10/31/14). The Council of Institutional Investors just joined the fray, asking the Delaware Bar to intervene and move the state General Assembly to ban the use of these bylaws. Academics have prodded the Securities and Exchange Commission to address the issue (12 CARE 1313, 10/17/14).

Recently, proxy adviser Institutional Shareholder Services, Inc. updated its benchmark voting policies to include a general policy to “vote against bylaws that mandate fee-shifting whenever plaintiffs are not completely successful on the merits (i.e., in cases where the plaintiffs are partially successful)” (12 CARE 1481, 11/14/14).

After a bill last session stalled in response to business concerns, the Delaware General Assembly is scheduled to take up a bill in January that would prohibit all “loser pays” bylaws (12 CARE 1481, 11/14/14).

To contact the reporter on this story: Michael Greene in Washington at

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

Request Corporate on Bloomberg Law