Tag Archives: bylaws

Citing “Issue Preclusion,” the Delaware Court of Chancery Denies Advancement to a Company’s Vice President

The Delaware Court of Chancery typically holds that a corporation must advance the fees and expenses of an executive or officer-level employee who is required to defend a civil, criminal, administrative or investigative action by virtue of his or her employment with the company. Recently, however, Vice Chancellor J. Travis Laster held that a plaintiff was not entitled to advancement because he did not prove that someone with the bare title of “Vice President,” without any managerial or supervisory responsibilities, fit within the definition of “officer” found in the relevant bylaws.

The Court of Chancery’s holding in Aleynikov v. The Goldman Sachs Group, Inc., C.A. No. 10636-VCL (Del. Ch., July 13, 2016) was based, in large part, on its conclusion that it was bound by an incorrect finding by the Third Circuit in a related action because the doctrine of “issue preclusion prevent[ed] relitigation of wrong decisions just as much as right ones.”

To read the full text of the Alert, please visit www.duanemorris.com.

Corporate Governance In Chapter 11 – Business As Usual, With Possible Exceptions

Under the Bankruptcy Code, a debtor in possession operates its business “as usual” during the pendency of a case. Likewise, in most cases, prepetition corporate governance practices and procedures should continue post-petition. In fact, as Judge Sontchi recently held in In re SS Body Armor I, Inc., Case No. 10-1125(CSS) (Bankr. D. Del. April 1, 2015), the right of a shareholder to compel a shareholders’ meeting for the purpose of electing a new board of directors continues during bankruptcy.  Absent “clear abuse,” the automatic stay of 11 U.S.C. §  362 is inapplicable.`

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Fee-Shifting Bylaws–Remain In A State of Flux

As we previously reported on this page, the topic of fee-shifting bylaws being adopted to shift the costs of shareholder litigation to shareholder plaintiffs and those who assist them has been the subject of activity in both Delaware’s courts and its General Assembly.  While the General Assembly is poised to take up the issue of fee-shifting bylaws in the new legislative session (the subject of an upcoming blog post), we wanted to report on the issuance of the first written decision from the Court of Chancery addressing a challenge to a fee-shifting bylaw that had been adopted by a stock corporation.

On March 16, 2015, Chancellor Bouchard issued his decision in Strougo v. Hollander, et al., C.A. No. 9770-CB (Del. Ch. March 16, 2015), in which he granted plaintiff’s motion for judgment on the pleadings, and which challenged the efficacy of a fee-shifting bylaw adopted by the board of directors of First Aviation Services, Inc.  It is important to note that the facial validity of fee-shifting bylaws was not before the court on this motion.  Rather, the plaintiff moved on a much narrower issue, that is, whether a fee-shifting bylaw adopted after he was no longer a stockholder–but before he filed litigation challenging conduct that occurred while a stockholder–was valid for that litigation.

The board of directors of First Aviation, at the behest of its controlling stockholder, adopted a reverse stock split that had the purpose and effect of freezing out the minority shareholders and taking the company private.  Plaintiff Strougo’s interest in First Aviation was eliminated via the transaction.  Shortly after the reverse stock split, First Aviation adopted the following bylaw:

Section VII.8.  Expenses for Certain Actions.  In the event that (i) any current or prior stockholder or anyone on their behalf (collectively a “Claiming Party”) initiates or asserts [any] claim or counterclaim (collectively a “Claim”), or joins, offers substantial assistance to or has a direct financial interest in any Claim against the Corporation or any director, officer, assistant officer or other employee of the Corporation, and (ii) the Claiming Party (or the third party that received substantial assistance from the Claiming Party or in whose Claim the Claiming Party has a direct financial interest) does not obtain a judgment on the merits that substantially achieves, in substance or amount, the full remedy sought, then each Claiming Party shall be obligated jointly and severally to reimburse the Corporation and any such director, officer, assistant officer or employee for all fees, costs and expenses of every kind and description (including, but not limited to, all reasonable attorneys’ fees and other litigation expenses) that the parties may incur in connection with such Claim.

First Aviation did not disclose to its former stockholders that it had adopted this new bylaw provision.  After the adoption of the bylaw, and unaware of its existence, former-stockholder Strougo filed suit in the Court of Chancery alleging that the reverse stock spit was unfair to the minority stockholders.  When the company informed Mr. Strougo and his counsel of the bylaw, plaintiff amended his pleading to also challenge the fee-shifting bylaw.

Chancellor Bouchard rejected the application of the fee-shifting bylaw to Mr. Strougo and this litigation.  Because the courts of Delaware have consistently construed bylaws as a contract between the company and its stockholders, he held the new bylaw could not apply to Mr. Strougo and his suit because it was adopted after he was no longer a stockholder, and thus, not a party to that “contract.”  Moreover, the litigation challenged conduct that occurred prior to the adoption of the fee-shifting bylaw.

While acknowledging the “serious policy questions implicated by fee-shifting bylaws in general” and the fact that the total value of the reverse stock split was less than $100,000, the Chancellor noted the reality that “applying the bylaw in this case would have the effect of immunizing the Reverse Stock Split from judicial review because, in [his] view, no rational stockholder–and no rational plaintiff’s lawyer–would risk having to pay the Defendants’ uncapped attorneys’ fees to vindicate the rights of the Company’s minority stockholders, even though the Reverse Stock Split appears to be precisely the type of transaction that should be subject to Delaware’s most exacting standard of review to protect against fiduciary misconduct.”

With this decision–and pending legislation on this front–the topic of how Delaware corporate entities might use bylaw provisions to control shareholder litigation continues to be a hot topic in Delaware corporate law.

 

Fee-Shifting Corporate Bylaws–The Judicial Challenges Begin

As discussed in a previous post, the Delaware General Assembly has tabled its consideration of a bill that would ban fee-shifting bylaws for traditional corporations until the next legislative session. This legislative push followed the Delaware Supreme Court’s holding, in responding to certified questions of law, that “fee shifting provisions in a non-stock corporation’s bylaws can be valid and enforceable under Delaware law”. See ATP Tour, Inc., et al. v. Deutscher Tennis Bund (German Tennis Federation), et al., No. 534, 2013 (Del. Supr. May 8, 2014). The fee-shifting bylaws being considered are designed to shift the company’s costs (including attorneys’ fees) of successfully defending against litigation prosecuted by a company’s stockholders to the stockholder plaintiff. As one might imagine, such a scenario might be seen as a “game changer” with regard to shareholder representative litigation.

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“Fee-Shifting” Bylaws–A New Tool to Stem the Tide of Shareholder Litigation?

On May 8, 2014, the Delaware Supreme Court issued an en banc response to certified questions of law from the U.S. District Court for the District of Delaware, in which the Supreme Court held that a “fee shifting” bylaw provision in a non-stock corporation’s bylaws “can be valid and enforceable under Delaware law.” ATP Tour, Inc. v. Deutscher Tennis Bund (German Tennis Federation), et al., No. 534, 2013 (Del. May 8, 2014). The bylaw at issue would shift the company’s defense fees and costs to a member who had sued the company (or any other member) and was unsuccessful in “substantially achiev[ing], in substance and amount, the full remedy sought” in the litigation.

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