On June 18, 2015 the Delaware Governor signed into law a statute banning bylaws clauses providing for fee-shifting in derivative actions (so called “English rule”). While the “loser pays” rule was a big disincentive to meritless claims, it was also a significant hindrance to bring those derivative actions all together.
As we know the American principle is that every party bears its own litigation expenses (so called “American rule”). With the banned clause, instead, Delaware companies were allowed to recoup legal defense costs from losing investors. Now they cannot anymore.
To soften the impact of the ban, the new law provides that Delaware companies can insert clause forcing the litigation in Delaware. This is thought to allow the very sophisticated Delaware judges to dismiss ungrounded derivative actions, without the possibility that investors sue in another jurisdiction seeking a more complacent forum.
For more information, see this article.
