Fee Shifting Bylaws in Delaware: The Facts on the Ground (Part 8)

We are discussing fee shifting bylaws and the hearing held in Kastis v. Carter. Here is how the court came out at the hearing on the bylaw. 

  • The Court:  In the first instance, picking up with Mr. Grant's last proposal--and the devil is often in the details of these things--but if there is a way to get the plaintiffs and you in agreement that the challenge of the SLC process can be concluded without jeopardy of the bylaw being applied, that seems to me like something you ought to tell me you can work out. Come back to me and tell me if you have worked it out, and we can proceed on that basis. Absent working such an arrangement out, my views on the situation right now lay out sort of in the following way. 
  • We're in a very odd procedural context. I don't think it's appropriate for me to be adjudicating a bylaw, the validity of a bylaw or an as-applied challenge to a bylaw, if that were ever asserted, without it actually being asserted in the pleading in the first instance. So the key thing that has to happen in my mind is the plaintiffs have to make some decisions.
  • Now, they're going to be able to make those decisions in a much better context than when they walked into the courtroom I think today. But the first decision the plaintiffs have to make is do they want to litigate the validity of this bylaw. And if so, they should amend their complaint and say they want to do so and assert such a claim. And leave would be granted that there would not be an issue in this circumstance if that were opposed, but I would expect it would be unopposed. And there would be an amended pleading. 
  • Then the plaintiffs have to make their second decision, which is what type of claim do they want to bring. Do they want to just assert a facial challenge? And you've been told, and I will hold the defendants to their representation, that you can assert such a challenge without jeopardy of the bylaw applying. Or do you want to make a facial challenge as well as an as-applied challenge? And admittedly, the commitment of the defendants is a little squishier there in terms of the reasonable and limited scope of discovery to permit such a challenge.
  • But, ultimately, the plaintiffs have to have the strength of their convictions and decide what kind of claim do they want me to adjudicate on this bylaw. With respect to whether they are willing to bring in a facial challenge alone or a facial challenge, as-applied challenge, and want to move forward on it. And as I indicated, there will be no jeopardy to the bylaw on the facial challenge based on the representation today. The as-applied would appear to be also an avenue to have a challenge without jeopardy, but you'd have to work out the details and make your own judgment--Mr. Hanrahan, I can't make them for you--on what the plaintiffs want to do in that regard. But until such a claim is actually pled, I think it's premature for me to be adjudicating the validity of this.
  • Now, if you assert such a claim in a pleading and amend your pleading to do so, I think we can brief the validity issue, if it's only the validity issue, on a reasonable basis. I think a normal ordinary course briefing type of schedule can bring the issue to the Court's attention. There are, underlying this--and I'm not prejudging anything--many very interesting issues, undoubtedly. This is a for-profit corporation. This is not a non-profit corporation. There are issues of retroactive application in a way that was not considered by ATP that are at issue here because it's purporting to have potential retroactive application to underlying conduct, not just to the universe of shareholders to whom it would apply. I see that as a different issue. There is a bond issue that's different here. There are policy implications about liability to stockholders and for-profit corporations that are at issue here.
  • But all those things would need to be briefed thoroughly; and that has not occurred to date in a way that the Court could intelligently consider those issues. And it hasn't occurred in a way with the defendants even really having an opportunity to respond to most of those arguments because they appeared in this reply brief. So I would--and to be clear, I am sympathetic to plaintiffs' situation, again, absent this last issue that Mr. Grant raised as to whether or not there is a clear path to get this case done in terms of the SLC litigation. If you can work that out and want to proceed on that basis and go down that track, not worry about the bylaw, we'll do that. If you can work it out and you have confidence that you're not in jeopardy in a way you think you can get that work done, that's one track.
  • The other track is you can assert this claim, but if you're going to assert it, you put it in a pleading. And if you're going down the second track and you're not comfortable, you have comfort on the first track; that is, to litigate without jeopardy the SLC issues, I will hold the SLC issues in abeyance while we do the litigation over the facial validity of the as-applied issue on the bylaw. And if you want to go the as-applied route, you can make a motion for expedition, and I think it would be something that should be considered promptly.
  • I'm not sympathetic to the notion--and I think, largely, Mr. Grant, you diffused this, and I appreciate that--of barreling ahead either simultaneously or solely with the SLC-related litigation without sorting out this bylaw issue because I view the bylaw issue to have been a creation of the defendants in the middle of this case to change the rules. And in that context, you know, the rules of the game going forward, as I see, are what I've laid out for 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.