John Solak v. Paylocity Holding Corporation
153 A.3d 729
| Del. Ch. | 2016Background
- In 2015 Delaware amended the DGCL: §115 permits adoption of exclusive-forum bylaws for "internal corporate claims," and §109(b) was amended to state that bylaws "may not contain any provision that would 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."
- Paylocity’s board adopted Article VIII (Feb. 2016): Section 8.1 is a Delaware exclusive-forum bylaw; Section 8.2 (the Fee‑Shifting Bylaw) conditions fee-shifting on a stockholder bringing or supporting an internal corporate claim outside Delaware and failing to obtain a judgment that "substantially achieves" the full remedy sought.
- Plaintiff Solak (a Paylocity stockholder) filed a putative class action seeking declarations that the Fee‑Shifting Bylaw is invalid under DGCL §109(b) (Count I) and §102(b)(6) (Count II), and asserting breach of fiduciary duty against directors for adopting the bylaw and related disclosure failures (Count III).
- Defendants moved to dismiss for lack of ripeness (no extra‑forum suit has been filed) and for failure to state a claim. The Court found the challenge ripe because the bylaw’s deterrent effect could preclude any future test of its validity.
- The Court held Count I (§109(b)) survives: §109(b) unambiguously prohibits any bylaw imposing fee liability on stockholders in connection with internal corporate claims, regardless of forum. Counts II (§102(b)(6)) and III (breach of fiduciary duty) were dismissed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Ripeness to review facial challenge | Bylaw’s deterrent effect makes judicial review necessary now | Not ripe because no stockholder has sued outside Delaware or intends to | Ripe — deterrent effect makes litigation likely to never occur if review delayed; Court may decide now |
| Validity under DGCL §109(b) | §109(b) flatly prohibits any bylaw shifting a corporation’s attorneys’ fees/expenses in connection with internal corporate claims | §109(b) must be read with §115 (no exception for extra‑forum claims); common law fee-shifting and savings clause save bylaw | Hold: Fee‑Shifting Bylaw facially invalid under §109(b); statute unambiguously bars such provisions regardless of forum |
| Validity under DGCL §102(b)(6) | Fee shifting imposes personal liability for corporate "debts," which §102(b)(6) forbids absent charter provision | Bylaw permissible because §102(b)(6) ambiguous; fiduciary‑conduct exception may apply | Dismissed — plaintiff failed to show facial invalidity under §102(b)(6); meaning of "debts" and applicability of exception are not inevitably dispositive |
| Breach of fiduciary duty against directors | Directors acted in bad faith by knowingly adopting an unlawful bylaw and by inadequate disclosure | Directors were disinterested, likely advised, and included a savings clause; no facts show scienter or process failure | Dismissed — complaint fails to plead facts giving rise to a reasonable inference of bad faith or scienter |
Key Cases Cited
- Boilermakers Local 154 Ret. Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013) (recognized Court’s authority to decide facial validity of forum bylaws)
- ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A.3d 554 (Del. 2014) (held fee‑shifting bylaws permissible for non‑stock corporations)
- Frantz Mfg. Co. v. EAC Indus., 501 A.2d 401 (Del. 1985) (bylaws presumed valid; construe in harmony with law)
- Central Mortgage Co. v. Morgan Stanley Mortg. Capital Holdings LLC, 27 A.3d 531 (Del. 2011) (12(b)(6) standard articulated)
- VLIW Tech., LLC v. Hewlett‑Packard Co., 840 A.2d 606 (Del. 2003) (contract ambiguity standard for surviving dismissal)
- Stroud v. Milliken Enters., Inc., 552 A.2d 476 (Del. 1989) (declaratory‑judgment jurisdiction requires an actual controversy)
- A.W. Fin. Servs., S.A. v. Empire Res., Inc., 981 A.2d 1114 (Del. 2009) (statute may displace common law when in conflict)