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Commercial Litigation | Monday, august 11, 2014 | 9

individuals for whom a fee-shifting bylaw shareholders concerning their votes on major at 6 (1995). Allowing stock corporations to survive such a challenge.

would preclude any lawsuit (no matter how corporate transactions, recommended that adopt fee-shifting bylaws would simply have First, it may be prudent to submit such
meritorious) for fear of becoming responsible shareholders vote in favor of 97.31 percent a similar effect on Delaware state-law share- an amendment to a shareholder vote
for a crushing attorneys’ fee award. Such a of these transactions.9 These statistics sug- holder litigation: while it might chill individual even if the company’s certificate of incor-
bylaw could prevent shareholders from fulfill- gest that many shareholder lawsuits are not shareholder litigation, it should do little to poration permits the board to amend the
ing their important role in policing the board’s performing an important policing function
intimidate a large institutional investor that
company’s bylaws without shareholder
and the corporation’s conduct, such a plaintiff approval. It would be difficult for a share-
would argue.4 This is fundamentally different holder to argue that a bylaw approved by
from ATP, where the plaintiffs and the defen- the majority of shareholders is inequitable.
dants were substantial entities that, presum- Delaware courts have a long-standing tradi- The court in ‘ATP’ also explained that a facially valid bylaw’s

ably, would not be as deterred by the threat tion recognizing the power of shareholder enforceability “may turn on the circumstances surrounding its
of a fee-shifting mechanism.
democracy, finding in various contexts that adoption and use.”
But such an argument would be con- a fully-informed shareholder vote over-
trary both to the recent trend in Delaware comes allegations of wrongdoing. See In re
law and the objective statistics concerning Netsmart Techs. S’holders Litig., 924 A.2d at all, but instead are brought to generate believes it has a meritorious claim.
shareholder litigation. Studies show that 171, 207 (Del. Ch. 2007) (Strine, V.C.) (“Dela- plaintiffs’ attorneys’ fees.
This is not to say that every fee-shifting
shareholder lawsuits often have more costs ware corporate law strives to give effect to Moreover, the notion that the prospect of bylaw amendment would be valid as adopted.
than benefits for shareholders, particularly business decisions approved by properly an attorneys’ fee award could deter stockhold- The court in ATP also explained that a facially
where the lawsuits result in disclosure-only motivated directors and by informed, dis- er corporations’ shareholders is simply not valid bylaw’s enforceability “may turn on the

settlements.5 For example, shareholders chal- interested stockholders. ... Thus, doctrines borne out by the facts. These shareholders circumstances surrounding its adoption and
lenged 94 percent of deals valued over $100 like ratification and acquiescence operate are not just mom-and-pop individual inves- use.” Thus, a shareholder plaintiff may be
million in 2013,6 and plaintiffs requested an to keep the judiciary from second-guessing tors. In fact, according to at least one source, able to defeat a fee-shifting bylaw amendment
average of $1.1 million in attorneys’ fees for transactions when disinterested stockhold- institutional investors owned 73 percent of by showing, for example, that the bylaw was
each suit.7 This high shareholder challenge ers have had a fair opportunity to protect shares of the top 1,000 U.S. Corporations in enacted to harm shareholders or protect
rate for 2013 was no anomaly. Shareholders themselves by voting no.”). By extension 2009.10 Indeed, when confronting a similar directors’ personal interests (such as their
challenged 70.42 percent of transactions here, if a majority (or supermajority) of problem in the federal securities class action entrenchment on the board).
announced and completed between 2005 informed shareholders favor a fee-shifting context, Congress enacted the Private Securi-

and 2012, with the percentage rising dra- bylaw amendment, a Delaware court would ties Litigation reform Act of 1995 in part to Practical Considerations
matically in recent years.8 Yet Institutional likely be loath to conclude that the fee-shift- encourage large, institutional investors to
Shareholder Services, a proxy advisory firm ing provision is inequitable to shareholders. serve as lead plaintiffs and control securities A board can take prudent steps to increase
that advises some of the largest institutional
Of course, such a shareholder » Page 12
class action litigation. See S. rep. No. 104-98,
the likelihood that a fee-shifting bylaw would

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