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Keywords

plaintifflitigationattorneyliabilitystatutemotioncorporationadoptionjudicial reviewmotion to dismiss
plaintifflitigationattorneyliabilitystatutemotioncorporationadoptionjudicial reviewmotion to dismiss

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Solak v. Sarowitz, 153 A.3d 729

Facts

The case arose when Paylocity's board adopted a fee-shifting bylaw that required stockholders who filed internal corporate claims outside of Delaware to reimburse the corporation for litigation expenses unless they obtained a favorable judgment. The plaintiff, a stockholder, argued that this bylaw was invalid under the DGCL, which prohibits such provisions. The board's adoption of the bylaw followed legislative changes aimed at preventing fee-shifting bylaws in Delaware corporations, reflecting concerns that such provisions would deter stockholders from pursuing legitimate claims.

The case arose when Paylocity's board adopted a fee-shifting bylaw that required stockholders who filed internal corporate claims outside of Delaware to reimburse the corporation for litigation expenses unless they obtained a favorable judgment. The plaintiff, a stockholder, argued that this bylaw was invalid under the DGCL, which prohibits such provisions. The board's adoption of the bylaw followed legislative changes aimed at preventing fee-shifting bylaws in Delaware corporations, reflecting concerns that such provisions would deter stockholders from pursuing legitimate claims.

Issue

Whether the fee-shifting bylaw adopted by Paylocity's board of directors is valid under Delaware General Corporation Law, specifically Sections 109(b) and 102(b)(6).

Whether the fee-shifting bylaw adopted by Paylocity's board of directors is valid under Delaware General Corporation Law, specifically Sections 109(b) and 102(b)(6).

Rule

Delaware General Corporation Law Section 109(b) prohibits corporate bylaws from imposing liability on stockholders for attorneys' fees or expenses in connection with internal corporate claims.

Delaware General Corporation Law Section 109(b) prohibits corporate bylaws from imposing liability on stockholders for attorneys' fees or expenses in connection with internal corporate claims.

Analysis

The court determined that the fee-shifting bylaw was facially invalid under Section 109(b) because it imposed liability on stockholders for the corporation's litigation expenses, which the statute explicitly prohibits. The court emphasized that the bylaw's deterrent effect on stockholders seeking to enforce their rights warranted judicial review, as it could prevent the validity of the bylaw from ever being challenged if left unaddressed.

The court determined that the fee-shifting bylaw was facially invalid under Section 109(b) because it imposed liability on stockholders for the corporation's litigation expenses, which the statute explicitly prohibits. The court emphasized that the bylaw's deterrent effect on stockholders seeking to enforce their rights warranted judicial review, as it could prevent the validity of the bylaw from ever being challenged if left unaddressed.

Conclusion

The court held that the fee-shifting bylaw was invalid under Section 109(b) of the DGCL and denied the corporation's motion to dismiss the stockholder's claims regarding this bylaw.

The court held that the fee-shifting bylaw was invalid under Section 109(b) of the DGCL and denied the corporation's motion to dismiss the stockholder's claims regarding this bylaw.

Who won?

The stockholder, John Solak, prevailed in part as the court ruled that the fee-shifting bylaw was invalid under Delaware law, allowing his challenge to proceed.

The stockholder, John Solak, prevailed in part as the court ruled that the fee-shifting bylaw was invalid under Delaware law, allowing his challenge to proceed.

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