Fee Shifting Bylaws in Delaware: The Facts on the Ground (Part 4)

Plaintiffs challenged the fee shifting bylaw adopted by the board of Hemispherx. The trial court was concerned that a challenge to the bylaw did not appear in the complaint.  

Counsel for Plaintiffs nonetheless sought a decision by the court on the validity of the bylaw. In part, they asserted that challenging the bylaw, including the process of drafting and submitting an amended complaint, could itself be a continuation of the litigation sufficient to trigger the imposition of fees should shareholders not prevail. Counsel for the company, however, strategically took the issue off the table.  

  • THE COURT: Is the company prepared to commit--and we can take it in stages--one, to allow--whether we put it in a pleading or not, we'll get to that separately--litigation over the facial validity of a bylaw to occur without seeking to impose, if it goes unfavorably for the plaintiffs, the application of the bylaw against the plaintiff--anybody--the plaintiff, plaintiff's counsel, anybody?
  • MR. GRANT: For that phase of litigation, yes. 

Said another way: 

  • THE COURT: Okay. Now let me take it to the next step. How about will it apply to anybody for purposes of making a factual record and bringing on a claim--a Schnell claim, basically--that it may have been adopted for an improper purpose? Is the company prepared to commit that it won't seek to apply the bylaw in that circumstance if it works out for the plaintiff?
  • MR. GRANT: When you say "anybody," you mean a different plaintiff?
  • THE COURT: No, no, no. In this case. In this case. Let's assume Mr. Hanrahan amended his complaint, sought declaratory judgment that the bylaw is invalid, asserted a breach of fiduciary duty claim or whatever claim he wants to bring saying it was adopted for an inequitable purpose. I hear you saying that on Count I, declaratory judgment, facially invalid, the company is not going to enforce this bylaw to litigate that issue. I appreciate that concession, if you will. What I'm asking you now is for purposes of Count II, if he litigates over whether it was adopted for an inequitable purpose, takes discovery surrounding the circumstance of the adoption of the bylaw, litigates that issue, is the company prepared to commit or not that it will seek to enforce that bylaw against anybody? If you don't have a--look, I'm not going to like tear something out of you you're not prepared to commit, but it would help me sort through things if I knew your position on that.
  • MR. GRANT: Understood, and I appreciate that. The company's position on that question, Your Honor, is if the amount of discovery required is reasonably cabined so we're not talking about 20 depositions, then, yes, we will commit not to seek to apply the bylaw against plaintiffs for an as-applied or is-it-equitable type of challenge. Now, if--I don't think they need 10 or 20 depositions, but if it became a huge discovery program, I'd like the opportunity to consult with our client before giving a firm answer.
  • THE COURT: I appreciate that. Thank you.

Primary materials, including the hearing transcript, in Kastis v. Carter can be found at the DU Corporate Governance web site.    

J Robert Brown Jr.