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May 27, 2014

NY Times’ Davidoff Examines Impact of Delaware Supreme Court “Fee-Shifting Bylaw” Ruling

The New York Times’ Steven M. Davidoff weighs in on the recent Delaware Supreme Court decision that allows a private company to, “amend its bylaws to adopt a provision that makes the loser in any shareholder litigation pay the other side’s fees.”

The Delaware Court’s decision applied to a private company, ATP Tour (which operate’s a men’s tennis circuit) which has members instead of shareholders. Two of the company’s members sued over a decision, “to downgrade the status of a tournament in Hamburg, Germany.”

If courts begin to enforce such company bylaws which make the “loser pay”, Davidoff writes, “it could put a serious dent in merger litigation.”

The impact of this decision, writes Davidoff, has yet to be fully seen — especially as it applies to publicly traded companies. He notes that the Delaware Court writes, “that whether a fee-shifting bylaw is enforceable ‘depends on the manner in which it was adopted and the circumstances under which it was invoked.’”

Davidoff opines that a combination of “market forces” (i.e., pushback from investors) and state legislation to counteract the court ruling, could make, “the life of the fee-shifting bylaw” short-lived.

He also notes, however, that plaintiffs’ firms are taking the ruling quite seriously, and one Delaware defense firm put out a memo noting that the practical effect of the ruling was, “that many boards of directors of private and public Delaware corporations should seriously consider adopting fee-shifting bylaws of their own.”

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