Fee-Shifting Bylaws: An Empirical Analysis

Shareholder litigation has long played a central but highly controversial role in American corporate governance. In 2014, the Delaware Supreme Court took a step that had the potential to dramatically reduce the amount of such litigation. In its landmark decision in ATP Tour, Inc. v. Deutscher Tennis Bund, the court embraced the legality of so-called fee-shifting bylaws. Such bylaws typically require plaintiff-shareholders to bear a corporation’s litigation expenses if their suit does not succeed. Only a year later, however, the Delaware legislature overruled ATP by promulgating a ban on fee-shifting provisions. From a policy perspective, the crucial question is whether allowing fee-shifting bylaws benefits shareholders. Although many scholars have weighed in on this issue, no empirical study has examined the ATP decision’s impact on shareholder wealth. This article fills that gap. Using a hand-collected data set on fee-shifting provisions, I show that the legalization of fee-shifting bylaws reduced shareholder wealth.