In ATP Tour, Inc. v. Deutscher Tennis Bund, the Delaware Supreme Court held that a private company's fee-shifting bylaw was facially valid. And before that decision, Delaware courts similarly upheld companies' use of forum-selection bylaws requiring that intra-corporate disputes be litigated in a single designated forum. Many interpreted these holdings as broad endoresements of bylaws that could regulate the litigation process itself and a move by the Delaware courts to curtail shareholder litigation. Indeed, the Delaware legislature itself responded to ATP, amending the state's corporate law to explicitly prohibit Delaware companies from adopting fee-shifting bylaws for shareholder litigation. But the legislature simultaneously allowed Delaware companies to adopt forum-selection bylaws.
In this Article, we show that ATP and caselaw related to forum-selection bylaws will not result in calamity for investors or provide a silver bullet for companies to end shareholder and securities litigation. Rather, when carefully and fairly read, these decisions simply reaffirm the Delaware Way, under which corporate managers are vested with broad legal authority, but that authority is tempered by principles of equity. Using ATP and fee-shifting bylaws as a point of departure, we provide a template for equitable analysis of not only fee-shifting bylaws, but also forum-selection bylaws and other bylaws relating to litigation. Furthermore, as we argue in this Article, had equitable principles been properly applied to fee-shifting bylaws, equitable principles would have likely prevented fee-shifting bylaws from extinguishing meritorious shareholder or securities litigation anyway. In fact, the only kind of fee-shifting bylaw that would likely have survived equitable scrutiny is one that already exists under Delaware's Rule 11--one that provides that a neutral arbiter can approve of two-way shifting of reasonable fees in response to frivolous litigation. Ultimately, perhaps the most compelling case for legislation barring fee-shifting bylaws in other states that follow the Delaware Way is that doing so may spare litigants and the system the lengthy, common-law process that will likely arrive at the state of the law already in place.
Table of Contents I. INTRODUCTION II. PERCEIVING ATP AS PART OF THE JUDICIAL RESPONSE TO THE EXPLOSION OF DEAL LITIGATION III. UNDERSTANDING ATP AS PART OF THE DELAWARE WAY A. The Delaware Way B. ATP as Part of the Delaware Way IV. FEE-SHIFTING BYLAWS UNDER THE DELAWARE WAY AND A TEMPLATE FOR EQUITABLE LIMITS ON BYLAWS GENERALLY A. The Unocal Standard of Review Governs Bylaws Tainted by the Omnipresent Specter of Self-Interest B. Under Unocal, The Bylaw Must Be Proportionate and Reasonable in Relation to a Legitimate Threat to Corporate Welfare 1. A Legitimate Threat 2. Reasonableness and Proportionality C. Applying Unocal to Fee-Shifting Bylaws 1. Frivolous Litigation 2. Reasonable Fees 3. Two- Way Fee Shifting 4. Neutral Arbiter V. EQUITABLY APPROPRIATE FEE-SHIFTING BYLAWS AND FEE SHIFTING UNDER DELAWARE RULE 11 VI. CONCLUSION I. INTRODUCTION
In ATP Tour, Inc. v. Deutscher Tennis Bund, the Delaware Supreme Court held that a private company's fee-shifting bylaw was facially valid. (1) That bylaw was especially wide-reaching. It applied to current shareholders, former shareholders, and anybody who assisted them in investigating or suing on their claim. (2) It required fee shifting in any case where the plaintiffs obtained anything short of a full judgment in their favor or that differed from the relief initially sought in the complaint. (3) And it shifted not just lawyers' fees but costs of every kind. (4)
Many have interpreted ATP as & broad endorsement of fee-shifting bylaws and a move by the Delaware courts to curtail shareholder litigation. (5) Commentators have warned or celebrated (depending on their point of view) that ATP would permit public companies to adopt similar fee-shifting bylaws for all sorts of shareholder and securities lawsuits. (6)
The prospect that companies organized in Delaware and elsewhere would race to adopt fee-shifting bylaws that apply to shareholder and securities litigation caused alarm. According to some, fee-shifting bylaws leave shareholder and securities litigation on the precipice of becoming "an empty threat" (7) and "eviscerate)] investor rights." (8) According to others, fee-shifting bylaws "chill)] the assertion of meritless claims" (9) and represent a "new weapon [in] ... the corporate arsenal to deter shareholder litigation." (10)
In response to these concerns, the Delaware legislature amended its corporate law to explicitly provide that "[t]he certificate of incorporation [or the Bylaws] may not contain any provision that would 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 ..." (11) At the same time, the Delaware legislature also made clear that Delaware companies may adopt forum-selection bylaws. (12)
In this Article, we show that the Delaware legislature's decision to prohibit fee-shifting bylaws and to allow forum-selection bylaws is consistent with the equitable limits placed on any such bylaw under Delaware case law, including those articulated by ATP itself. ATP--when carefully and fairly read--simply reaffirms the "Delaware Way." (13) Under the Delaware Way, corporate managers are vested with broad legal authority, but that authority is tempered by principles of equity. (14) Likewise, in ATP, the Delaware Supreme Court held that even if fee-shifting bylaws are facially valid, principles of equity limit their application. (15) Those same principles of equity also limit the use of forum selection bylaws, despite the fact that the Delaware legislature has made explicit their facial validity. (16)
Using A TP and fee-shifting bylaws as a point of departure, we provide a template for equitable analysis of not only fee-shifting bylaws, but also forum-selection bylaws and other bylaws relating to litigation. Further, as we argue in this Article, when equitable principles are properly applied, they will likely preclude the use of such bylaws to extinguish meritorious shareholder or securities litigation. As we demonstrate, before any court--including those states that follow Delaware's corporate law--will enforce a fee-shifting or forum-selection bylaw, the board of directors must meet its burden of proving that adopting and implementing that bylaw comports with its fiduciary duties of care and loyalty. Specifically, the only kind of fee-shifting bylaw that is likely to survive equitable scrutiny by any court following the Delaware Way is one that is balanced, or "proportionate"--one that provides that a neutral arbiter can approve of two-way shifting of reasonable fees in response to frivolous litigation.
Moreover, we find that the fee-shifting bylaws that will survive equitable review simply duplicate the existing mechanism for patrolling frivolous litigation: Rule 11. That Rule also provides for a neutral arbiter to approve of two-way shifting of reasonable fees in response to frivolous litigation. Ultimately, we demonstrate that the Delaware legislature's decision to prohibit fee-shifting bylaws on their face avoids years of litigation surrounding fee-shifting to arrive at the state of the law already in place. Perhaps the most compelling reason for legislative intervention was to spare litigants and the system the lengthy, common-law process that would have gotten us to a world that already exists.
PERCEIVING ATP AS PART OF THE JUDICIAL RESPONSE TO THE EXPLOSION OF DEAL LITIGATION
There is nothing inherently objectionable about corporate deals. (17) Yet lately, shareholder plaintiffs have challenged nearly every deal in court, (18) claiming that the board sold the company for too little, refused to sell at a premium, or did something to affect the price adversely. (19) Deal litigation is now so common that it has amounted to what some call "a feeding frenzy." (20) The number of deal challenges lends credence to this criticism. Specifically, in 2005, shareholders challenged only about half of all $ 100million deals in court, yet by 2010, shareholders were claiming that more than 90% of these deals were, in some way, unfair. (21) A columnist for the New York Times reports that deal litigation is "a big issue these days because once you've announced a deal, you are likely to get sued. Really." (22)
The near-automatic litigation that accompanies deals has led to skepticism among academics and members of the bar concerning the worth of these lawsuits. (23) Likewise, the Delaware judiciary has questioned the value of such frequent merger litigation. (24) In fact, Delaware judges have taken a number of steps to address the concerns of deal-litigation critics.
First, critics contend that deal litigation is brought not by concerned shareholders, but by shareholders who are little more than pawns of plaintiffs' firms. (25) Critics observe that these shareholders often hold just a few shares and, presumably, stand to gain, at most, a few dollars from any successful challenge. (26) In short, these are not truly aggrieved investors, but figurehead plaintiffs for lawyer-driven lawsuits.
Reacting to these criticisms, Delaware courts moved away from legal rules that facilitated lawyer-driven deal challenges. (27) For example, Delaware courts abandoned the first-to-file approach to appointing a lead plaintiff (and thus lead counsel), instead announcing a number of factors to consider in appointing the lead plaintiff, including, among other things, the economic stake of the plaintiffs, the absence of any conflicts, and the competence of counsel. (28) Moreover, there is at least one example of a Delaware judge invoking Delaware Rule 23's typicality requirement to conduct a more searching inquiry into whether the shareholder plaintiff has...