Anthony Rickey and Ben Edwards (who was inadvertently omitted from an earlier version) posts:
After Delaware prohibited fee-shifting provisions in corporate bylaws,[1] scholars considered alternate means by which corporations might use private ordering to limit the ability of stockholder plaintiffs to bring lawsuits challenging corporate actions. For instance, Professor Sean Griffith suggested that corporations should adopt “no pay” provisions that, unlike fee-shifting provisions, would prohibit a corporation from paying the legal fees of stockholder plaintiffs.[2] Griffith’s proposal is similar to one put forward by another Delaware practitioner shortly before the fee-shifting ban.[3] Other commentators have suggested that such “no pay” bylaws may be the wave of the future.[4]
“No pay” provisions may be permissible under Delaware law, because they do not “impose liability on a stockholder for the attorneys’ fees or expenses of the corporation or any other party in connection with an internal corporate claim. . . .”[5] Nonetheless, like fee shifting, they may also curtail stockholder litigation by limiting the ability of plaintiffs’ counsel to recover fees. Indeed, unlike fee-shifting bylaws (which would generally allow for fees to be paid to successful stockholder plaintiffs), “no pay” bylaws could potentially preclude payments even to some successful litigants.
Although commentators have discussed these provisions in theoretical terms, several companies have already adopted “no pay” provisions.
[1] See 2015 Del. Laws Ch. 40 (S.B. 75), available at http://legis.delaware.gov/BillDetail?legislationId=24380.
[2] See Sean J. Griffith, Private Ordering Post-Trulia: Why No Pay Provisions Can Fix the Deal Tax and Forum Selection Provisions Can’t (January 5, 2016); The Corporate Contract in Changing Times, Steven Davidoff Solomon and Randall S. Thomas, eds., (2017 Forthcoming); Fordham Law Legal Studies Research Paper No. 2855950, available at SSRN: https://ssrn.com/abstract=2855950.
[3] See A Thompson Bayliss & Mark Mixon. “No Pay” Provisions: The Forgotten Middle Ground in the Fee-Shifting Battle, Harvard Corporate Governance Blog, (June 1, 2016), available at https://corpgov.law.harvard.edu/2015/06/01/no-pay-provisions-the-forgotten-middle-ground-inthe-fee-shifting-battle/.
[4] See Kevin LaCroix, “More about Litigation Reform Bylaws: Will ‘No Pay’ Provisions Succeed Where Forum Selection Bylaws Have Failed?”, The D&O Diary, at http://www.dandodiary.com/2017/01/articles/securities-laws/litigation-reform-bylaws-will-no-pay-provisions-succeed-forum-selection-bylaws-failed/.
[5] See 8 Del. C. § 109(b) (prohibiting fee-shifting bylaws); see also 8 Del. C. § 102(f) (prohibiting fee-shifting provisions in certificate of incorporation). An “internal corporate claims” are defined as “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.” 8 Del. C.§ 115. See also Griffith, supra n. 2, at 16-17 (arguing that “no pay” provisions are consistent with recent amendments to the DGCL).
He goes on to identify companies that have adopted such bylaws and speculate on their validity.
The issue poses an interesting question of statutory interpretation; namely, if we assume that the legislative intent behind banning fee shifting bylaws was to prevent bylaws from being used to choke off shareholder litigation, should that intent inform judicial extension of the statute to cover no pay bylaws as well? Ot should we take a more narrow approach and say "if the Delaware legislature had intended to ban no pay bylaws they would have done so. They only banned fee shifting bylaws, so the legislation doesn't;t reach the former."
First, there is the quite general principle of “purposivism” or the “mischief rule.” It would seem to argue for extending the statute to include no pay bylaws. Justice Scalia & Bryan Garner define this rule as “[t]he interpretive doctrine that a statute should be interpreted by first identifying the problem (or ‘mischief’) that the statute was designed to remedy and then adopting a construction that will suppress the problem or advance the remedy.” Antonin Scalia & Bryan A. Garner, Reading Law 433 (2012); see also 2A Sutherland Statutory Construction § 54:4 (7th ed.). Note that Scalia & Garner are broadly critical of purposivism throughout their book, and their definition should not be read as an endorsement. This principle is directly incorporated in interpretation guidelines by some legislatures (although not Delaware). See N.Y. Stat. Law § 95 (McKinney) (“The courts in construing a statute should consider the mischief sought to be remedied by the new legislation, and they should construe the act in question so as to suppress the evil and advance the remedy.”).
Second, there is a principle known as “extensive equitable interpretation” (a flavor of purposivism) by which a judge will “extend a statute to cover similar items even if the statute does not say so.” See William D. Popkin, A Dictionary of Statutory Interpretation 83-84 (2007); see also 2B Sutherland Statutory Construction § 54:5 (7th ed.) (“Broadly speaking, courts will extend a statute to include situations which would reasonably have been contemplated by the legislature in light of the circumstances giving rise to the legislation.”). It too would seem to argue for extending the statute to no pay bylaws.
Personally, I tend to be a plain text guy, so I would opt for holding that the statute only bans fee shifting bylaws.
