John Coffee highlights an important wrinkle in the legislation proposed by the Delaware state bar to ban fee shifting bylaws and charter provisions:
Fee-shifting bylaws and charter provisions are only precluded “in connection with an intracorporate claim.” What is that? Proposed new Section 115 of the DGCL would define “intracorporate claim” to mean “claims, including claims in the right of the corporation, (I) that are based upon a violation of a duty by a current or former director or officer or stockholder in such capacity, or (II) as to which this title confers jurisdiction upon the Court of Chancery.” ...
Coffee goes on to point out, I think correctly, that the legislative language appears to have been carefully crafted to permit fee shifting bylaws that apply to federal securities regulation:
Before we assume that the narrow phrasing of Sections 102 and 109 was an oversight by the Corporation Law Council, we need to consider the alternative possibility: namely, that they deliberately wrote it narrowly. Why? This is speculative and may sound cynical, but the Corporation Law Council may have wanted to cover only traditional “Delaware-style” litigation (where the interests of the Delaware Bar on both sides were jeopardized if “loser-pays” fee-shifting were to reduce the volume of such litigation). In contrast, securities litigation tends not to be brought in Delaware nor to involve Delaware counsel in most cases. If the goal was to protect the local Bar, nothing more needed to be done than to exempt “Delaware-style” litigation from the impact of “loser pays” fee shifting.
Because I believe that the bill is intended to protect the interests of the Delaware bar, I find that a very plausible hypothesis.
Coffee goes on to offer a detailed preemption analysis, which concludes--albeit somewhat tentatively--that state laws authorizing (even implicitly) fee shifting bylaws that apply to federal securities regulation would be invalid.
Apropos of which, William Sjostrom has a new article out that deals with the preemption issue:
The Article examines the intersection of fee-shifting bylaws and federal private securities fraud suits. Specifically, the Article hypothesizes about the effects fee-shifting bylaws would have, if enforceable, on private securities fraud litigation. It then turns to the validity of fee-shifting bylaws under federal law and concludes that they are invalid as applied to securities fraud claims. In light of this conclusion, the Article considers whether Congress should pass legislation to validate fee-shifting bylaws and determines that it should not.
Note: The Appendix at the end of the Article includes some data on corporations that have adopted fee-shifting bylaws or charter provisions between May 8, 2014 and March 16, 2015.
The Intersection of Fee-Shifting Bylaws and Securities Fraud Litigation (March 19, 2015). Washington University Law Review, Forthcoming. Available at SSRN: http://ssrn.com/abstract=2580943
I recommend reading both pieces.
