No Delaware court decision re fee-shifting bylaw on an as-applied basis

by Cydney Posner

It now appears that the Delaware court will not address the as-applied validity of a fee-shifting bylaw in the case involving Hemispherx. (As discussed in this post and this Cooley Alert, the Delaware Supreme has already ruled in another case that a “fee-shifting” bylaw adopted by the board of a non-profit was “facially valid” under Delaware law.)  In this case, Kastis v. Carter, plaintiffs filed a derivative suit challenging certain bonus amounts awarded to Hemispherx board members. After the complaint was filed, the company adopted a fee-shifting bylaw that purported to apply retroactively to the plaintiffs. in July, counsel for the plaintiffs’ asked the Delaware Chancery Court either to invalidate the company’s fee-shifting bylaw or to remove them as counsel from the suit.

When we last tuned in, at a scheduling conference, the plaintiffs said that, before proceeding with the substance of the case, they wanted the bylaw first declared invalid, arguing that they were reluctant to make any move forward in the case because of the potential for “crippling financial liability” if they were not completely successful. The Court, however, said that it would not address the bylaw issues until plaintiffs amended their complaint to include a challenge to the bylaw. After the conference, plaintiffs’ counsel moved for leave to file an amended complaint which, as the court had indicated, included a challenge to the fee-shifting bylaw, arguing that the bylaw made the litigation “economically irrational,” and that it was contrary to Delaware law and policy on a number of grounds.

On September 16, the Court denied the plaintiffs’ motion for leave to amend its complaint based on Hemispherx’s and the other defendants’ commitment that the Hemispherx fee-shifting bylaw would have no application to this litigation and that they would not assert the bylaw as a basis for fee-shifting in this case. As a result, the plaintiffs’ challenge to the validity of the bylaw will not be litigated. It remains to be seen what action, if any, is taken by the Delaware legislature when it takes up the issue of fee-shifting bylaws, as expected, in 2015.

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