2016 • Volume 40 • Number 3

Fee Shifting: Delaware’s Self-Inflicted Wound

By:Stephen M. Bainbridge

In its 2014 ATP Tour, Inc. v. Deutscher Tennis Bund opinion, the Delaware Supreme Court upheld a fee-shifting bylaw, which required unsuccessful shareholder litigants in either derivative or direct actions to reimburse the corporation for its legal expenses. Although the entity in question was a nonprofit, nonstock corporation, most observers expected the Delaware courts to extend that holding to for-profit stock corporations. In the months that followed, about fifty Delaware corporations adopted such bylaws.

In its 2015 legislative session, however, the Delaware General Assembly adopted amendments to the Delaware General Corporation Law—S.B. 75—that effectively bans such bylaws. This Article argues that the ban on fee-shifting bylaws is contrary to sound public policy and adverse to Delaware’s own interests. It then advances an interest group analysis, focusing on the power of the Delaware bar to explain why the Delaware legislature would have inflicted such a serious wound on itself.

This analysis leads to two take-home lessons. First, if it wishes to ensure that future legislation advances both sound public policy and the State’s financial interests, the Delaware legislature needs to free itself from the bar’s influence. In addition, the business community needs to invest lobbying resources in Delaware so as to counter the bar’s influence in cases such as this. Second, states in which the corporate bar wields less legislative influence thus may have a significantly easier time adopting legislation authorizing such bylaws. If so, the likelihood that S.B. 75 will significantly reduce Delaware’s dominance of corporate law will go up substantially.