“No Pay” Bylaws May Threaten Shareholder Lawsuits

After Delaware prohibited fee-shifting provisions in corporate bylaws,[1] scholars considered alternate means by which corporations might use private ordering to limit the ability of stockholder plaintiffs to bring lawsuits challenging corporate actions.  For instance, Professor Sean Griffith suggested that corporations should adopt “no pay” provisions that, unlike fee-shifting provisions, would prohibit a corporation from paying the legal fees of stockholder plaintiffs.[2]  Griffith’s proposal is similar to one put forward by another Delaware practitioner shortly before the fee-shifting ban.[3]  Other commentators have suggested that such “no pay” bylaws may be the wave of the future.[4]

“No pay” provisions may be permissible under Delaware law, because they do not “impose liability on a stockholder for the attorneys’ fees or expenses of the corporation or any other party in connection with an internal corporate claim. . . .”[5]  Nonetheless, like fee shifting, they may also curtail stockholder litigation by limiting the ability of plaintiffs’ counsel to recover fees.  Indeed, unlike fee-shifting bylaws (which would generally allow for fees to be paid to successful stockholder plaintiffs), “no pay” bylaws could potentially preclude payments even to some successful litigants.

Although commentators have discussed these provisions in theoretical terms, several companies have already adopted “no pay” provisions.  These provisions typically emerged at the same time that firms adopted fee-shifting provisions.  For instance, the bylaws of one company provide that:

To the fullest extent permitted by law, in the event that any Claiming Party initiates or asserts any Claim or joins, offers substantial assistance to, or has a direct financial interest in any Claim against any Corporation Parties, then, regardless whether the Claiming Party is successful on its Claim in whole or in part, (i) the Claiming Party shall bear its own Litigation Costs, and (ii) the Claiming Party and the Claiming Party’s attorneys shall not be entitled to recover any Litigation Costs or, in a derivative or class action, to receive any fees or expenses as the result of the creation of any common fund, or from a corporate benefit purportedly conferred upon the corporation.[6]

The company approved this “no pay” bylaw, along with a fee-shifting bylaw, prior to Delaware’s ban on fee-shifting.[7]  The revisions also included a severability clause purporting to preserve the remainder of the bylaws if a section were held to be unenforceable.[8]

We conducted a limited search of the Securities and Exchange Commission’s EDGAR database to look for other examples of “no pay” bylaws.[9]  This revealed nine similar provisions, six involving Delaware corporations.

Company State of Incorporation “No Pay” Bylaw
Adoption Date
The LGL Group, Inc. DE 6/11/2014
Epiq Systems, Inc. MO 10/8/2014[10]
Air Industries Group NV 10/22/2014
Barnwell Industries, Inc. DE 12/12/2014
Frequency Electronics, Inc. DE 12/17/2014
Bridgeline Digital, Inc. DE 2/10/2015
PrimeEnergy Corp. DE 5/20/2015
Net Element Inc. DE 6/15/2015
Event Cardio Group Inc. NV 8/11/2016

At least two companies that adopted “no pay” bylaws, however, have since revoked them.[11]

It remains to be seen how the Delaware courts will respond to these “no pay” provisions.[12]  The fact that several corporations adopted these provisions, often along with fee-shifting bylaws, before Delaware instituted its ban on fee-shifting argues in favor of their enforceability.  After all, had the Delaware legislature meant to prohibit such bylaws, Sections 102(f) and 109(b) of the Delaware General Corporation Law could have been drafted to encompass them.  On the other hand, the Court of Chancery might hold that provisions such as the one set forth above conflict with its equitable power to impose fees, particularly where those fees arise from a common fund, and are thus paid by the class as part of its recovery.

As of yet, Delaware courts do not appear to have addressed the enforceability of “no pay” bylaws.  However, this survey suggests that it may be simply a matter of time before a test case emerges.


[1] See 2015 Del. Laws Ch. 40 (S.B. 75), available at http://legis.delaware.gov/BillDetail?legislationId=24380.

[2] See Sean J. Griffith, Private Ordering Post-Trulia: Why No Pay Provisions Can Fix the Deal Tax and Forum Selection Provisions Can’t (January 5, 2016); The Corporate Contract in Changing Times, Steven Davidoff Solomon and Randall S. Thomas, eds., (2017 Forthcoming); Fordham Law Legal Studies Research Paper No. 2855950, available at SSRN: https://ssrn.com/abstract=2855950.

[3] See A Thompson Bayliss & Mark Mixon. “No Pay” Provisions: The Forgotten Middle Ground in the Fee-Shifting Battle, Harvard Corporate Governance Blog, (June 1, 2016), available at https://corpgov.law.harvard.edu/2015/06/01/no-pay-provisions-the-forgotten-middle-ground-inthe-fee-shifting-battle/.

[4] See Kevin LaCroix, “More about Litigation Reform Bylaws:  Will ‘No Pay’ Provisions Succeed Where Forum Selection Bylaws Have Failed?”, The D&O Diary, at http://www.dandodiary.com/2017/01/articles/securities-laws/litigation-reform-bylaws-will-no-pay-provisions-succeed-forum-selection-bylaws-failed/.

[5] See 8 Del. C. § 109(b) (prohibiting fee-shifting bylaws); see also 8 Del. C. § 102(f) (prohibiting fee-shifting provisions in certificate of incorporation).  An “internal corporate claims” are defined as “claims, including claims in the right of the corporation, (i) that are based upon a violation of a duty by a current or former director or officer or stockholder in such capacity, or (ii) as to which this title confers jurisdiction upon the Court of Chancery.”  8 Del. C. § 115.  See also Griffith, supra n. 2, at 16-17 (arguing that “no pay” provisions are consistent with recent amendments to the DGCL).

[6] Bridgeline Digital, Inc., Form 10-Q, Ex. 3.2, Art. VIII, Sec. 8(b) (Amended and Restated Bylaws, as amended Feb. 10, 2016) (Feb. 17, 2015).  These bylaws appear to be the most recent version.  See Bridgeline Digital, Inc., Form 10-K at 74 (Dec. 19, 2016).

[7] See Bridgeline Digital, Inc., Form 10-Q, Ex. 3.2, Art. VIII, Sec. 8(a).

[8] See id., Art. VIII, Sec. 9 (“If any provision (or any part thereof) of these By-laws shall be held to be invalid, illegal or unenforceable as applied to any circumstance for any reason whatsoever: (i) the validity, legality and enforceability of such provisions in any other circumstance and of the remaining provisions of these By-laws (including, without limitation, each portion of any section of these By-laws containing any such provision held to be invalid, illegal or unenforceable that is not itself held to be invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby and (ii) to the fullest extent possible, the provisions of these By-laws (including, without limitation, each such portion containing any such provision held to be invalid, illegal or unenforceable) shall be construed for the benefit of the corporation to the fullest extent permitted by law so as to (a) give effect to the intent manifested by the provision held invalid, illegal or unenforceable, and (b) permit the corporation to protect its directors, officers, employees and agents from personal liability in respect of their good faith service. Reference herein to laws, regulations or agencies shall be deemed to include all amendments thereof, substitutions therefor and successors thereto, as the case may be.”).

[9] Specifically, we used SEC’s Full-Text Search feature for the phrase “Claiming Party shall bear its own Litigation Costs.”  This search is likely underinclusive, as it would not return a no-pay bylaw that used alternate language to arrive at the same result.

[10] The “no pay” provision applied to actions brought in courts outside those selected by the company in its forum selection bylaw.  See Epiq Systems, Inc., Form 8-K, Ex. 3.1 § 7.7(c) (filed Oct. 9, 2014) (imposing fee-shifting and “no pay” provision where plaintiff “brings a Covered Action in any forum other than a Chosen Court”).

[11] See Epiq Systems, Inc., Form 8-K (filed June 7, 2016) (repealing forum selection bylaw which included “no pay” provision); Net Element, Inc., Form 8-K (filed July 10, 2015) (removing “no pay” provision “[t]o preemptively comply with the State of Delaware legislation that has been passed to amend the Delaware General Corporation Law to prohibit Delaware stock corporations from adopting bylaws with fee-shifting provisions”).

[12] In at least one case, a plaintiff stockholder challenged a “no fee” provision adopted by a Delaware company (along with a fee-shifting provision) as unenforceable under Delaware law.  However, the company rescinded the bylaw, rendering the lawsuit moot, before the Court of Chancery could rule on the issue.  See StemCells, Inc., Form 8-K (filed July 1, 2016) (describing litigation in Guardino v. Stemcells, Inc., C.A. No. 12266-CB (Del. Ch.)).

This post comes to us from Anthony Rickey, a litigator and founder of Margrave Law, and Benjamin P. Edwards, an assistant professor at Barry University’s Dwayne O. Andreas School of Law (leaving in May 2017 to become an associate professor at the University of Nevada, Las Vegas’ William S. Boyd School of Law).