Delaware's Fee-Shifting Debate Set To Reignite Despite Ban


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Even though Delaware has banned corporate bylaws that force a litigation loser to pay both sides' costs, experts say the fervent debate over fee-shifting is about to be rekindled as some companies that have sought creative ways around the statute are already facing shareholder lawsuits in the Chancery Court over the workarounds.

Delaware enacted a law that banned fee-shifting bylaws in August 2015, about a year after the issue was thrust into the spotlight by the state's Supreme Court decision in ATP Tour v. Deutscher Tennis Bund finding that fee-shifting can be "valid and enforceable" for nonstock corporations.

The threat of stock corporations picking up the baton sparked an unusually passionate debate over the issue for Delaware, but experts say the law banning the practice, which was signed by Gov. Jack Markell in June 2015, hasn't entirely closed the book on fee-shifting — and some companies are already trying to push the law's boundaries.

"You can expect that people are going to be creative in trying to get what they want in their corporate governance documents, irrespective of the government's attempt to tell them how to run their corporations," said David Graff, co-chair of Anderson Kill PC's corporate and commercial litigation practice group.
Graff says he believes when the fee-shifting issues again reach the Chancery bench, it will "construe [the law] as narrowly as possible" and goes as far as arguing that such bylaws enacted before the law went into effect might still be defensible as valid in a challenge.
"Retroactively, you've basically unwound a good-faith negotiation," Graff said. "Governments are very rarely, especially in Delaware, inclined to interfere and inject themselves into internal corporate issues."