NEW YORK, March 18, 2015 (GLOBE NEWSWIRE) -- Pomerantz LLP ("Pomerantz") achieved a precedent-setting corporate governance victory for stockholders in Strougo v. Hollander, C.A. No. 9770-CB (Del. Ch. Mar. 16, 2015), a closely-watched test case concerning fee-shifting bylaws. The Court, accepting Pomerantz's argument, invalidated a fee-shifting bylaw adopted by Defendants after Plaintiff and the Class were forcibly cashed out of their shares through a high-threshold Reverse Stock Split.
Pomerantz argued that Defendants' adoption of the bylaw after Plaintiff's ownership interest was extinguished was contrary to Delaware contract and corporate law, and impermissibly infringed on stockholders' rights. The Court held that "a former stockholder is no longer a party to the corporate contract and thus not subject to any bylaw amendments occurring after his or her interest as a stockholder was eliminated."
In contrast to the "American Rule" that each party pays its own costs in litigation, fee-shifting bylaws threaten the viability of virtually all stockholder litigation by passing defendants' legal costs to stockholder plaintiffs. Fee-shifting bylaws thus effectively immunize corporate wrongdoers from prosecution.
Gustavo Bruckner, head of Pomerantz's corporate governance practice, commented, "This case is a prime example of why fee-shifting bylaws are pernicious. Here a controlling stockholder forcibly cashed out minority stockholders. The board wrongfully allowed this taking to occur and then adopted a fee-shifting provision which essentially served as a unilateral grant of immunity from prosecution."
Indeed, the Court recognized that "the Reverse Stock Split appears to be precisely the type of transaction that should be subject to Delaware's most exacting standard of review to protect against fiduciary misconduct."
The Court, in acknowledging that fee-shifting bylaws have a deleterious effect on meritorious stockholder litigation, stated that "no rational stockholder—and no rational plaintiff's lawyer—would risk having to pay the Defendants' uncapped attorneys' fees to vindicate the rights of the Company's minority stockholders."
Mr. Bruckner further stated, "Had defendants succeeded in their quest to bind former stockholders to bylaws adopted after their interests were extinguished, the ramifications would have been far-reaching and disastrous."
Pomerantz LLP, with offices in New York, Chicago, Florida, and San Diego, is acknowledged as one of the premier firms in the areas of corporate, securities, and antitrust class litigation. Founded by the late Abraham L. Pomerantz, known as the dean of the class action bar, Pomerantz LLP pioneered the field of securities class actions. Today, more than 70 years later, Pomerantz LLP continues in the tradition he established, fighting for the rights of the victims of securities fraud, breaches of fiduciary duty, and corporate misconduct. The Firm has recovered numerous multimillion-dollar damages awards on behalf of class members. See www.pomerantzlaw.com.