Deterring Frivolous Shareholder Suits
07/17/2014Under the typical state corporate statute, including the Illinois Business Corporation Act (IBCA), shareholders of a business corporation may bring suit against the corporation’s management claiming damages for the directors’ breach of fiduciary duty owed to the corporation and its shareholders.
In many instances, disgruntled minority shareholders lack a factual basis for initiating suit, and such nuisance suits, and the fear of such suits can be costly, and interfere with the efficient operation of a corporation’s business.
The Delaware Supreme Court recently held that a corporation’s fee-shifting bylaw provision requiring a plaintiff who does not substantially achieve the judgment he or she seeks to reimburse the corporation for its attorneys’ fees and expenses can be valid and enforceable, provided the bylaw is properly enacted and properly applied. See ATP Tour, Inc. v. Deutscher Tennis Bund, 2014 Del. LEXIS 209 (Del. May 8, 2014)[1]. Although Illinois’ courts have not reviewed this specific issue, the reasoning of the Delaware Supreme Court (lack of prohibition in the State’s governing statute) appears to be equally consistent under Illinois law (“The by-laws may contain any provisions for the regulation and management of the affairs of the corporation not inconsistent with law or the articles of incorporation.” See 805 ILCS 5/2.25).
This ruling appears to be good news for management; a fee shifting provision such as the one at issue may help deter shareholder litigation, although there is no guaranty on how Illinois Courts will rule. Management needs to take care to ensure that the passage of such a bylaw is proper (i.e., authorized by the correct parties having authority to do so) and that such a bylaw is not passed for an improper purpose (i.e., not passed, for instance, after a shareholder has already initiated suit).
Stahl Cowen’s corporate practice group can provide effective and appropriate strategies to address the risk of nuisance shareholder suits and other entity governance and operational issues relating to your business, whether in connection with the organization of a new business entity, or for your established company.
[1] In ATP Tour, the Delaware Supreme Court reviewed the propriety of a provision of the bylaws of a non-stockcorporation (similar to a not-for-profit corporation in Illinois). It is important to note, however, that this decision appears to apply to business corporations: the portion of the Delaware General Corporation Law cited by the court (that dealing with proper bylaws) applies to both business corporations and non-stock corporations in Delaware. Illinois’ corporate law likewise provides great latitude for the type of bylaw that may be enacted.