Fee-Shifting and Shareholder Litigation

Article — Volume 104, Issue 1

104 Va. L. Rev. 59
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A fee-shifting provision, in a corporate charter or bylaws, requires the plaintiff-shareholder to reimburse the litigation expenses of the defendant-corporation when the plaintiff is not successful in litigation. After the Delaware Supreme Court ruled that such a provision is enforceable in 2014, a number of corporations adopted fee-shifting bylaws, utilizing the directors’ right to unilaterally amend bylaws without express shareholder approval. In 2015, the Delaware legislature reversed course by prohibiting fee-shifting provisions in both charters and bylaws. This back-and-forth history has left an important question unanswered: should fee-shifting be allowed in shareholder litigation and, if so, in what form?

This Article first makes a theoretical claim that the optimal fee-shifting arrangement lies somewhere between the pro-defendant version adopted by the corporations and the no-fee-shifting version mandated by the Delaware legislature. A more balanced fee-shifting provision will do better in encouraging meritorious lawsuits while discouraging nonmeritorious ones, especially with respect to direct shareholder lawsuits. For derivative lawsuits, a balanced fee-shifting rule will impose a higher threshold on the merits than the traditional, no-fee-shifting rule. The Article also undertakes an empirical investigation of fee-shifting provisions that are used in commercial agreements, notably stock purchase agreements and bond indentures, that employ more balanced fee-shifting arrangements but with variation. Building upon both the theoretical and empirical analyses, the Article finally argues that, instead of a categorical ban, the law should allow fee-shifting provisions in charters and bylaws but subject them to more robust judicial oversight. This will better allow the corporations and shareholders to realize the screening benefits of fee-shifting while protecting shareholders’ right to bring suit.

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  Volume 104 / Issue 1  

Should the Rules Committees Have an Amicus Role?

By Scott Dodson
104 Va. L. Rev. 1

Fee-Shifting and Shareholder Litigation

By Albert H. Choi
104 Va. L. Rev. 59

“Don’t Elect Me”: Sheriffs and the Need for Reform in County Law Enforcement

By James Tomberlin
104 Va. L. Rev. 113