Jackson Ross PLLC

Fighting an Activist Shareholder

I am in-house with a public company incorporated in Delaware.  We have an activist shareholder who has made filing lawsuits against us his hobby.  Fighting these meritless suits has cost us a considerable amount of both time and money.  What can we do about this person?

The first thing I would do is to make the shareholder an offer for his shares. The company can (and should) offer the shareholder a premium for his shares. Unfortunately, absent some provision in the bylaws stating otherwise—which would be unusual—the company cannot force the shareholder to accept a buyout. Since the shareholder is already causing major problems, it will not hurt to make a substantial buyout offer to the shareholder. It is at least a possibility that this is what the shareholder has been pining for.

Then, revise the company bylaws to add a provision that shareholders who file a lawsuit against the company are responsible for the company’s legal fees if the lawsuit is unsuccessful. A Delaware Supreme Court decision last year opened the door for companies to add such a fee-shifting provision. Though that decision, ATP Tour, Inc. v. Deutscher Tennis Bund, involved a non-stock membership corporation, the court’s decision cited several cases upholding the adoption of restrictive bylaws in stock corporations. The court did state that in order for a fee-shifting provision to be enforceable, the provision must have been enacted for a proper purpose and must be properly applied, but then basically defanged the first prong by stating that deterring litigation was not “invariably an improper purpose.”

Some commentators have implied that this decision allows a public company to adopt such a bylaw provision without shareholder approval. This is incorrect. Section 109(a) of the Delaware General Corporation Law (DGCL) provides that after a corporation has received payment for its stock, “the power to adopt, amend or repeal bylaws [belongs to] the stockholders entitled to vote.” A company should never amend its bylaws in a manner inconsistent with its certificate of incorporation, its bylaws, or the DGCL.

The ATP Tour decision was controversial and it is possible the Delaware General Assembly will pass a bill in 2015 invalidating any fee-shifting bylaws. However, as of this writing no such bill has been enacted. Please contact us for guidance in revising your organization’s bylaws.