Solak v. Sarowitz

The Delaware Court of Chancery reviewed a shareholder’s challenge to a fee-shifting provision found in a forum-selection bylaw that required all internal corporate claims be brought in Delaware. The bylaw also provided that any shareholder “who fails to obtain a judgment on the merits that substantially achieves … the full remedy sought, shall be obligated to reimburse [the corporation] for the attorneys’ fees and other expenses it incurred in connection with such action.” Although no internal corporate claim had yet been filed outside of Delaware, the Court determined that the shareholder’s action was ripe for review because of the substantial deterrent effect of the bylaw. The Court struck down the fee-shifting provision of the bylaw as a direct violation of Section 109(b) of the DGCL, which prohibits the use of a bylaw that imposes liability on shareholders for attorneys’ fees or expenses in connection with an unsuccessful internal corporate claim. The Court rejected the argument that Section 115, which permits Delaware organizational documents to choose Delaware as an exclusive forum for all internal corporate claims, and Section 109(b) were meant to be read together. The Court determined that 109(b) was intended to prohibit fee-shifting for all internal corporate claims, even when those claims are filed outside of Delaware in violation of an exclusive forum bylaw. The Court noted that Section 109(b) and Section 115 make no reference to one another and found that the plain text of Section 109(b) prohibits “any provision” that would shift fees in connection with an internal corporate claim.

BOTTOM LINE: Regardless of the structure of the bylaw, any provision that purports to shift fees to the shareholders in connection with an internal corporate claim is facially invalid. Delaware corporations should avoid any attempt to vary the rule as doing so will open the corporation up to shareholder claims such as breach of fiduciary duty.