On Dec. 27, 2016, the Delaware Chancery Court ruled that a fee-shifting bylaw was invalid. The fee-shifting bylaw provided that a stockholder who brought an internal corporate claim against the company outside of Delaware would be responsible for the company’s attorneys’ fees and expenses relating to the claim, unless the stockholder obtains a judgment on the merits. The company also adopted a bylaw that required internal claims to be filed in Delaware. The two bylaws together provided that if a stockholder violated the exclusive forum bylaw by bringing an internal action outside of Delaware, the fee-shifting bylaw would apply.
The company adopted these bylaws six months after Delaware enacted legislation prohibiting the use of fee-shifting bylaws. At the same time, Delaware enacted legislation permitting Delaware corporations to adopt bylaws requiring that internal claims must be filed exclusively in Delaware.
The Court held that the plain language of the fee-shifting bylaw violates the language of DGCL Section 109(b), which unambiguously prohibits the inclusion of any bylaw provision that would shift to a stockholder a company’s attorneys’ fees or expenses incurred in connection with an internal corporate claim, regardless of where the claim is filed. The Court rejected the company’s argument that the amendment to the DGCL prohibiting fee-shifting bylaws should be read together with the amendment permitting exclusive forum bylaws to permit fee-shifting when claims are filed outside of Delaware. The Court noted that Section 109(b) makes no distinction between claims filed within or outside of Delaware.