FEE-SHIFTING AND SHAREHOLDER LITIGATION

A fee-shifting provision, in a corporate charter or bylaws, requires the plaintiff-shareholder to reimburse the litigation expenses of the defendant-corporation when the plaintiff is not successful in litigation. After the Delaware Supreme Court ruled that such a provision is enforceable in 2014, a number of corporations adopted fee-shifting bylaws, utilizing the directors' right to unilaterally amend bylaws without express shareholder approval. In 2015, the Delaware legislature reversed course by prohibiting fee-shifting provisions in both charters and bylaws. This back-and-forth history has left an important question unanswered: should fee-shifting be allowed in shareholder litigation and, if so, in what form? This Article first makes a theoretical claim that the optimal fee-shifting arrangement lies somewhere between the pro-defendant version adopted by the corporations and the no-fee-shifting version mandated by the Delaware legislature. A more balanced fee-shifting provision will do better in encouraging meritorious lawsuits while discouraging nonmeritorious ones, especially with respect to direct shareholder lawsuits. For derivative lawsuits, a balanced fee-shifting rule will impose a higher threshold on the merits than the traditional, no-feeshifting rule. The Article also undertakes an empirical investigation of fee-shifting provisions that are used in commercial agreements, notably stock purchase agreements and bond indentures, that employ more balanced fee-shifting arrangements but with variation. Building upon both the theoretical and empirical analyses, the Article finally argues that, instead of a categorical ban, the law should allow feeshifting provisions in charters and bylaws but subject them to more robust judicial oversight. This will better allow the corporations and shareholders to realize the screening benefits of fee-shifting while protecting shareholders' right to bring suit.