Deleware Court Rules Fee Shifting Provision in By-laws Does Not Apply to Former Shareholder
Yesterday, a Delaware state court judge ruled an aviation repair-services company can’t enforce a fee-shifting bylaw against a plaintiff investor who was forcibly cashed out before the bylaw’s adoption. This is not only a case of first impression but a critical ruling as Delaware considers banning fee-shifting provisions in company by-laws entirely.
In granting the plaintiff’s partial summary judgment motion, the judge said the company won’t be able to shift its fees to the Plaintiff even if the company ultimately prevails at trial as the fee-shifting provision was adopted by the company’s board of directors after the plaintiff shareholder had been forcibly cashed out of his stock. Both Defendant First Aviation Services, Inc. and plaintiff Robert Strugo agreed that the question was an issue of first impression in Delaware, the judge noted.
Recent fee shifting provisions inserted in company by-laws has and will continue to have a chilling effect on stockholder lawsuits and a Delaware Court in the ATP Decision found not only were the by-law changes legal but that the shareholder would be liable for the defendant company’s fees and cost should the Plaintiff not prevail on 100% of their claims. A strong challenge is being mounted by Plaintiff attorneys and pension funds to overturn the fee-shifting provision ruling.