Case tests company attempt to shift expenses related to stockholder violations of exclusive forum clause in corporate bylaws.
I’ve been out of the blog game for a while, so I am now catching up on older stuff that I find interesting. Hopefully, it is not completely out of date. But what could be more interesting than laws about corporate bylaws?
This post involves some recent developments in Delaware bylaws. The short answer:
- Exclusive forum clauses are okay
- Fee shifting provisions, even for stockholder action violating the exclusive forum clauses are not okay.
So far, so good.
In response to another case, Delaware made a couple of changes to its corporations statute:
- Section 115 was added to permit corporations to adopt bylaws requiring claims to be brought solely in Delaware if they are based upon a violation of a duty by a current or former director or officer or stockholder in such capacity, or under the jurisdiction of the Court of Chancery; and
- Section 109(b) was amended to provide that bylaws may not impose liability on a stockholder for attorneys’ fees or expenses of the corporation or any other party in connection with Section 115 claims.
Paylocity amended its bylaws to adopt exclusive forum bylaws and to impose liability on a stockholder who brings a Section 115 claim outside of Delaware. Stockholders were not amused by the fee-shifting provision.
The court said that the plain text of the fee-shifting bylaw violates Section 109(b) despite Paylocity’s arguments that:
- Section 109(b) must be read with Section 115, thus permitting fee shifting for violations of an exclusive forum bylaw (Court: No exception in either provision to permit this exception to fee-shifting prohibition);
- common law permits fee-shifting (Court: Fee-shifting is allowed in private contracts, which are not subject to the prohibition of Section 109(b)); and
- the bylaw says “to the fullest extent permitted by law,” so it is limited (Court: There is no extent to which it is permitted, so it is invalid.)