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Delaware Chancery Court Could Weigh in on Fee-Shifting

September 24, 2014 | Posted in : Expenses / Costs, Fee Shifting, Legislation / Politics, Prevailing Party Issues

A recent Delaware Business Court Insider story, “Chancery Court Could Weigh in on Fee-Shifting,” reports that shareholders in a derivative action against a biopharmaceutical company are seeking to amend their Delaware Court of Chancery lawsuit so they can challenge the corporation’s fee-shifting bylaw requiring stockholders to bear the costs of unsuccessful litigation.  The motion, currently pending before Chancellor Andre G. Bouchard, could present the court with an opportunity to opine on the controversial bylaws.

Hemispherx Biopharma Inc., a Philadelphia biopharmaceutical company, was sued by its shareholders last June in the Chancery Court.  The stockholders alleged the company wasted corporate assets when it awarded a combined $2.3 million in incentive bonuses to its CEO, William A. Carter, and general counsel, Thomas K. Equels, after it raised $23 million through a common stock offering.  In addition, the plaintiffs asserted breach of fiduciary duties and unjust enrichment claims against the defendants in Kastis v. Carter.

While the case was moving through the Chancery Court, the Delaware Supreme Court upheld the validity of fee-shifting bylaws in ATP Tour v. Deutscher Tennis Bund.  The Supreme Court’s May decision carved out a corporate exception to the “American Rule” requiring parties in litigation to generally cover their own attorney fees and costs.

Delaware’s General Assembly attempted to draft legislation prohibiting corporations formed under state laws from drafting such provisions, but the bill was pulled after several entities, including the U.S. Chamber of Commerce, announced their opposition.  The bill’s sponsor, state Sen. Bryan Townsend (D-Newark) told Delaware Business Court Insider in June he planned to reintroduce the measure at the start of the next legislative session in January 2015.

After the Supreme Court’s ruling, several Delaware corporations, including Hemispherx, adopted fee-shifting provisions.  The Hemisphex bylaw, also known as Section 5.07, was implemented to apply retroactively to any litigation pending against the corporation, according to court documents.  Therefore, if the plaintiffs lose their case against the biopharmaceutical company, they will be responsible for the corporation’s attorney fees and legal costs.

Last month, Hemispherx’s shareholders filed a motion seeking to invalidate the bylaw and asked Bouchard if they can continue the case without exposure to financial difficulties.  “The plain terms of the bylaw … demonstrate an intent to force plaintiffs and their counsel to discontinue this litigation by threatening financial liability under the bylaw,” said plaintiffs attorney Michael Hanrahan of Prickett Jones & Elliott in the filing.  “The bylaw has had intended effect.  Plaintiffs and counsel have concluded that, of the bylaw is valid and enforceable, it would be economically irrational to continue this litigation.”

NALFA also reported on this issue in “Delaware Lawyers Draft Legislation to Protect Legal Fees” and “Delaware High Court Upholds Attorney Fee-Shifting in Corporate Bylaws”