Fee-Shifting Bylaws and Shareholder Wealth. 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 reduce the amount of such litigation dramatically. In its landmark ATP Tour, Inc. v. Deutscher Tennis Bund (“ATP”) decision, 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 on the merits. Only a year later, however, the Delaware legislature overruled ATP by adopting legislation banning fee-shifting provisions.

From a policy perspective, the crucial question is whether this prohibition benefits shareholders? Many scholars have weighed in on the policy issue. But, to date, no empirical study has examined the ATP decision’s impact on shareholder wealth. The present article fills this gap. Using a hand-collected data set on fee-shifting provisions, I show that the legalization of fee-shifting bylaws reduced shareholder wealth.