Fee Shifting in Derivative Suits and the Oklahoma Legislature
Fee shifting bylaws are an ongoing topic of debate. The Delaware Supreme Court approved these bylaws in the context of a non-stock company, however, some legal uncertainty continues to exist. No decision has yet extended them to for-profit stock companies. Nonetheless, an increasing number of companies have put them in place.
Oklahoma represents the first state to intervene in the debate legislatively. The State adopted a provision mandating the shifting of fees in derivative suits. The provision specifically applies to derivative suits “instituted by a shareholder” where there is a “final judgment.” In those circumstances, the court “shall require the nonprevailing party or parties to pay the prevailing party or parties the reasonable expenses, including attorney fees . . . incurred as a result of such action.”
Compared with the bylaws adopted by most Delaware companies, the provision is both narrow, it applies only to derivative suits, and is a bit more balanced. Shareholders who prevail are also guaranteed expenses, including attorneys' fees.
Nonetheless, the provision--in practice--is barely different than the bylaws adopted by Delaware companies, at least with respect to derivative suits. Because derivative suits are often dismissed on procedural grounds (the failure to make demand on the board), shareholders confront a real risk--irrespective of the merits of the claim--that they will not prevail. If they do not prevail, they will be forced to pay the other side's fees, something that can result in dollar amounts that stretch to six and seven figures.
This risk provides a significant disincentive to file a suit against the board for breach of fiduciary duties. And this is not simply speculation. In Kastis v. Carter, counsel for plaintiffs sought to strike down a fee shifting bylaw and, in the alternative, to obtain dismissal of the case. In other words, as long as shareholders confronted the risk of having to pay the company’s fees, the case would not continue.
These bylaws, therefore, have the potential to insulate board behavior from challenge. Because all states allow for the waiver of liability for breach of the duty of care (see Opting Only in: Contractarians, Waiver of Liability Provisions, and the Race to the Bottom), the impact of the fee shifting bylaws is to insulate challenges to boards for breach of the duty of loyalty, for bad faith, or for wasting corporate assets. In other words, it has the potential to render boards unaccountable for their actions as directors.
The Oklahoma Statute goes into effect on November 1, 2014.