Fee-Shifting Bylaw and Charter Provisions: Can They Apply in Federal Court? – The Case for Preemption

In the first months after a decision of the Delaware Supreme Court upholding a fee-shifting bylaw under which the unsuccessful plaintiff shareholder was required to reimburse all defendants for their legal and other expenses in the litigation, some 24 public companies adopted a similar provision – either by means of a board-adopted bylaw or by placing such a provision in their certificate of incorporation (in the case of companies undergoing an IPO). In effect, private ordering is introducing a one-sided version of the “loser pays” rules. Indeed, as drafted, these provisions typically require a plaintiff who is not completely successful to reimburse the other side’s legal expenses, and they apply not only to legal actions but to complaints to agencies by whistleblowers and others. In this testimony before the SEC’s Investor Advisory Committee, Professor Coffee evaluates the actions the SEC could take to slow this trend, the potential for interjurisdictional competition, and the case for federal preemption of such provisions in the case of securities class actions