A short time ago, a storm of controversy briefly emerged after a Delaware court endorsed a firm’s adoption of a fee-shifting bylaw. The controversy quieted down after the Delaware legislature adopted a statutory provision prohibiting fee-shifting bylaws. The fee-shifting provision controversy could be back, albeit this time in a different state. A Nevada legislator has introduced a bill in the state senate that would explicitly allow Nevada corporations to adopt provisions requiring fee-shifting in unsuccessful M&A litigation, as long as the deals were approved by a shareholder majority. University of Nevada Las Vegas Law School Professor Benjamin Edwards describes the legislation in a March 18, 2019 post on the Business Law Prof Blog (here).
On March 18, 2018, Senator Yvanna Cancela introduced Senate Bill 304 in the Nevada state senate. Section 5 of the proposed legislation authorizes Nevada corporations to adopt certain provisions in their articles of incorporation, including a provision designated the courts of Nevada as the exclusion forum for any “internal corporate claim.” (The bill defines the term to encompass inter-corporate disputes, including a claim in the right of the company based upon an alleged violation of duty.)
Section 2 of the bill specifically allows for fee-shifting in unsuccessful M&A-related claims where the transaction has been approved by a majority of disinterested shareholders. Section 5 of the bill also would allow Nevada corporations to adopt provisions in their articles of incorporation imposing liability on a shareholder for the attorneys’ fees, costs, and expenses of the corporation or any other party in connection with an unsuccessful internal corporate claim.
In discussing the bill’s fee-shifting provision, Professor Edwards states that the legislation “seems to recognize reality – that the real party in interest in much shareholder litigation is the attorney advancing the claim.”
Professor Edwards also notes that the legislation includes a provision to try to protect against “over-deterrence risks.” The bill authorizes the Secretary of State to put the rules in place allowing shareholder attorneys to indemnify their clients for fee awards. This provision, Professor Edwards states, “might cover some of the concerns that these provisions would simply spook any shareholder away from suing.” (As far as I can tell, the legislation is silent about the use of litigation financing and of after-the-event or similar insurance, both of which could become relevant for prospective Nevada shareholder litigants if the legislation passes.)
The legislation also includes a provision requiring that after three years the Secretary of State study the impact of the fee-shifting provisions on stockholders, corporate governance, and the business environment in Nevada. Professor Edwards notes with respect to this study provision that if the legislation passes and “fee-shifting does unleash some parade of horribles as detractors fear, Nevada could simply repeal it.”
The legislation would do a number of other things, which Professor Edwards described (in relevant part) as follows:
- Preserve and transfer any internal corporate claims to a Nevada corporation acquiring some other entity;
- Authorize the application of fee-shifting provisions to claims arising from a prior entity (so long as the transaction was approved by a majority of disinterested stockholders);
- Prohibit any provision that would forbid a shareholder from suing in Nevada courts;
- Provide that Nevada will have personal jurisdiction over any shareholder that sues outside of Nevada
Nevada’s legislature is not the first state legislature to take up proposed legislation authorizing fee-shifting in connection with shareholder litigation. As I discussed in a post at the time, in 2014 the Oklahoma legislature adopted a bill providing that in a shareholder initiated derivative action against a domestic or foreign corporation, the court “shall require the non-prevailing party or parties to pay the prevailing party or parties the reasonable expenses including attorneys’ fees, taxable as costs, incurred as a result of such action.” A copy of the Oklahoma legislation can be found here. The Oklahoma legislation is noteworthy in a number of respects, including the fact that it makes the fee-shifting to the unsuccessful litigant mandatory and does not even require the company involved to have a fee-shifting charter provision.
While Oklahoma has gone before, Nevada’s move may be more significant if for no other reason that, as Professor Edwards notes (citing to this article), “Nevada is the leading alternative to Delaware corporate law.” Other states did not follow after Oklahoma’s lead, but if the Nevada legislation were to pass, other states might well follow the lead, as a part of the time-honored “race to the bottom” competition between states when it comes to corporate law provisions.
As I have noted in prior posts discussing fee-shifting provisions, the larger issue is whether or the introduction of measures requiring or allowing fee-shifting portend a significant revision of what is known as the American Rule, whereby it has been the practice in this country that each litigation party will bear its own costs. As companies increasingly seek to introduce their own form of litigation reform through revision of their own bylaws, and as courts and legislatures evolve their response to these kinds of bylaw provisions, there is a possibility that these developments could work a major change to the traditional American Rule on attorneys’ fees. Which in turn could have a significant impact on the corporate litigation environment.
Alison Frankel’s March 19, 2019 post about the Nevada legislation on her On the Case blog can be found here.