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July 23, 2014

First Test of Delaware Fee-Shifting Ruling Heats Up

Earlier this month, Hemispherx BioPharma Inc. adopted a corporate bylaw that would force the plaintiffs’ in a pending shareholder lawsuit against the company to “cover the company’s legal frees if they didn’t win the suit.” This will be the first test of the recent Delaware Supreme Court ruling that allowed the adoption of such “fee-shifting” bylaws, reports the Wall Street Journal Law Blog.

Hemispherx BioPharma, based in Philadelphia, manufacturers drugs to treat immune diseases, such as AIDS. The shareholder lawsuit is over bonuses paid to the company’s executives back in 2012, and is currently pending in Delaware Chancery Court.

While a handful of companies, “mostly small biotech firms,” have adopted similar bylaws in recent weeks, Hemispherx goes further than some “by applying retroactively to pending litigation, and by requiring stockholders to post a bond to cover the costs.”

The plaintiffs’ lawyers in the case are asking a judge to invalidated the bylaw, claiming it unfairly “saddles” them with financial risk. The lawyers have asked to withdraw as counsel if the judge declines.

In the wake of the Delaware Supreme Court ruling allowing such “fee-shifting” bylaws, the Delaware legislature introduced legislation that would prohibit companies from passing such bylaws. That legislation, however, was tabled due, in large part, to the opposition of business organizations, including the U.S. Chamber Institute for Legal Reform.

“Whatever one’s view of whether a corporate fee shifting right should exist in Delaware law, it is clear the right presently exists,” said Michael Kelly, a lawyer for Hemispherx. “As long as it does, we can expect corporations to use it as a sword against cases that corporations themselves deem to be empty and frivolous.”

Read the full story here.

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