Fee Shifting Bylaws and the Challenge to the Internal Affairs Doctrine
Fee shifting bylaws were effectively authorized by the Delaware Supreme Court's decision in ATP. The opinion was excessively broad and not well reasoned. In many ways, however, it followed from the Chancery Court's decision in Chevron on forum selection bylaws. The latter case suggested that Section 109 of the Delaware Code imposed no real facial limits on bylaws that affected the judicial process. ATP was a short step from that reasoning.
Yet the decision has already had a number of unintended consequences, some of which may do long term damage to the preeminent position of Delaware in the development of corporate law. While the ATP court did not use the phrase "internal affairs," it is likely that the court saw the matter as arising from that doctrine. As a result, the validity of a fee shifting bylaw adopted by a Delaware corporation would be determined by Delaware, whether the courts or the legislature.
Yet the statute adopted in Oklahoma emphatically rejected that approach. The state decided to make fee shifting mandatory in derivative suits. Perhaps more importantly, the state applied the interpretation to actions filed by a "domestic or foreign corporation." In other words, the legislature has no intention of allowing the state of incorporation to determine rules of the game with respect to fee shifting in derivative actions, at least when the claim was filed in Oklahoma.
To the extent that fee shifting is not, in fact, a matter of internal affairs, then states can, individually, determine the applicable approach for actions filed in their jurisdiction. Other states could do what Oklahoma did and make application of fee shifting mandatory. States could also, however, take the opposite approach. They could, by statute, provide that fee shifting bylaws or articles are invalid for any derivative action filed within the state, whether by foreign or domestic corporations.
The Cornerstone data shows that, after Delaware, shareholder suits brought in merger cases are most commonly filed in New York and California. (The Cornerstone data is here). To the extent that either of these states invalidated fee shifting provisions, shareholders would have a considerable incentive to make them the forum of choice. The number of actions filed (on behalf of resident shareholders) would presumably skyrocket (and the number in Delaware plummet).
Such a prohibition would also provide a ready basis for the non-enforcement of forum selection bylaws. To the extent that companies had such bylaws in place, a court in NY or California (or any other jurisdiction that invalidated fee shifting bylaws) could easily view enforcement of a forum selection provision as unreasonable or inequitable where shareholders would be, as a result, subjected to the risk of fee shifting.
The issue is whether states like NY or CA would have an incentive to adopt this type of provision. In effect, the states would be inviting additional litigation, adding to the burden of the courts in the state. Perhaps the parties could be assessed fees to pay these costs. Moreover, as Delaware had learned, corporate litigation fills the hotels and restaurants, increasing economic activity and tax revenues.
In any event, the ATP decision has resurrected concern with the internal affairs doctrine, an issue that hasn't been front and center since the litigation over Section 2115 of the California Corporate Code. Moreover, it has the capacity to impact Delaware hegemony in the corporate law area. ATP, therefore, may be a management friendly decision but it may ultimately prove to be very unfriendly to Delaware.