August 19, 2020

Fee-Shifting: Del. Chancery Upholds “Loser Pays” Contract Term

In 2015, the DGCL was amended to expressly prohibit the use of fee-shifting bylaw provisions in connection with internal corporate claims, but are contractual fee-shifting arrangements also prohibited? That’s the issue the Chancery Court recently confronted In Manti Holdings, LLC, et al. v. Authentix Acquisition (Del. Ch.; 8/20).

If the name of this case sounds familiar, it may be because the Chancery Court has already issued a notable decision in this litigation. Vice Chancellor Glasscock previously held that a contractual “drag” right that effectively waived appraisal rights was enforceable under Delaware law.  In this go-round, the issue was whether, having prevailed in that litigation, the company could enforce the stockholder agreement’s “loser pays” provision.  As Steve Quinlivan’s recent blog on the case explains, Vice Chancellor Glasscock rejected the argument that the fee-shifting arrangement violated Delaware law:

The Petitioners noted that our law observes a hierarchy of authority for documents concerning shareholder rights: the DGCL comes first, then the charter, then the bylaws, then contracts. Provisions in lower-order documents cannot trump those in higher-order documents. The Petitioners pointed to the fee-shifting prohibitions of §§ 102(f) and 109(b), and argued based on these sections that enforcing a “loser pays” provision in a contract between a corporation and stockholders violates the hierarchy described above and is thus unenforceable.

The Court rejected this argument noting nothing in the plain language of §§ 102(f) or 109(b) prohibited the fee-shifting Respondent sought to enforce. The plain terms of these sections referred only to certificates of incorporation and bylaws and not to contracts.

In addition, the Court noted the expressed legislative intent shows that stockholder agreements were specifically carved out from these statutory prohibitions. The Bill synopsis provided for § 102(f) and § 109(b) of the DGCL states that those statutes are “not intended, however, to prevent the application of such [fee-shifting] provisions pursuant to a stockholders agreement or other writing signed by the stockholder against whom the provision is to be enforced.”

The fact that the fee-shifting provision applied to an appraisal rights waiver was also important. The Vice Chancellor noted that the case didn’t involve an underlying allegation of breach of fiduciary duty, which was the legislature’s apparent focus in prohibiting fee-shifting in charters and bylaws.

John Jenkins