The Delaware Supreme Court held in a recent decision that, under proper circumstances, it is permissible under Delaware law to have a corporate bylaw provision that requires a losing plaintiff shareholder to be responsible for the payment of all legal fees and all costs incurred by the corporation and other defendants where the plaintiff does not obtain a judgment on the merits for substantially all the relief sought. The court was clear to point out that while on its face such a bylaw provision is not contrary to Delaware corporate law, the facts and circumstances in each case would need to be examined to determine whether there were improper motives for adopting such a provision. For example, a changed bylaw provision imposing unanimous voting rammed home by a majority shareholder anticipating a lawsuit ahead would probably cause such a provision to be held unenforceable. On the other hand, such a bylaw provision included in an entity’s initial bylaws to deter future litigation is not an improper purpose and would not be rendered unenforceable. The court said “The intent to deter litigation, however, is not invariably an improper purpose.” Obviously, many plaintiffs’ lawyers have been complaining vociferously about the decision.
Michael W. Margrave