Fee-Shifting Bill Expected for Early June Vote Before Delaware House Committee

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By Michael Greene

May 13 — Within the month, the Delaware House Judiciary Committee is expected to take up a divisive bill that would restrict the ability of corporations to adopt “loser pays” bylaws or charter provisions, primary sponsor Sen. Bryan Townsend (D-Newark) told Bloomberg BNA May 13.

The day before, the Delaware Senate passed the bill 16-5.

SB 75 still needs to be approved by the full state House before it can reach Gov. Jack Markell's (D) desk. Townsend said the House committee would vote in “early to mid June, most likely.”

Tracking a proposal by the Delaware State Bar's Corporation Law Section, the pending bill would, among other things, invalidate fee-shifting provisions in stock corporations and would endorse Delaware exclusive forum selection clauses. 

Before the Senate passed the bill, it rejected 12-7 an amendment proposed by Senate minority leader F. Gary Simpson (R-Milford) that would have deleted the sections related to fee-shifting and forum selection provisions.

Sen. Townsend, who introduced the bill earlier this month, said on the Senate floor May 12 that the proposed legislation is a balance of a variety of considerations, and argued that the proposed amendment eviscerates that balance and the work done by a diverse number of people.

Differing Views Heard

Before voting on the bill, the Senate heard from speakers on both sides of the proposal.

Former SEC Commissioner Paul S. Atkins, now the chief executive officer of Patomak Global Partners LLC, said he was “rather surprised by the stark, unequivocal and nuanced language” of the bill pertaining to fee-shifting. “What stuns me about this is that it slams the door on experimentation, which I think is really the ethos of Delaware corporate law.”

The bill is “bad for shareholders, bad for employees of corporations and good for lawyers,” he said, arguing that it flies in the face of the national bipartisan trend to fight abusive litigation.

Conversely, former Delaware Vice Chancellor Stephen P. Lamb and current partner at Paul, Weiss, Rifkind, Wharton & Garrison, told the Senate that “the two elements that the amendment seeks to strike will in very important ways give the court of chancery greater authority to control the conduct of litigation,” he said, noting that the Delaware Chancery Court already has extensive powers to control and penalize people who bring frivolous litigation to the court, and that he exercised those powers as a judge. When cases are filed in different courts around the country, it is difficult for the court to dismiss non-meritorious claims, he added.

Norman Monhait, chairman of the corporation law section and shareholder with Rosenthal, Monhait & Goddess, P.A., voiced his support for the unamended bill. Echoing sentiments made by Lamb, he told the Senate that “what this bill seeks to do is to restore the status quo that existed a year ago.”

“Private litigation … is the only mechanism currently in the law to enforce statutory obligations of our corporate law and also the common law of fiduciary duty,” he added.

Fee-shifting effectively precludes shareholder litigation, Monhait said. There will be a vacuum that some government agency, most likely the federal government, will step in to fill, and “that will not be a good day for our state.”

Litigation Reform Bylaws 

Bylaw and charter provisions that restrict the litigation rights of shareholders have been a lightning rod of controversy in the corporate community. 

Many have raised concerns about the significant number of lawsuits arising out of M&A deals, with companies enacting litigation reform measures, such as fee-shifting bylaws, in response. 

The effort to restrict fee-shifting was provoked in large part by the May 2014 Delaware Supreme Court decision in ATP Tour Inc. v. Deutscher Tennis Bund. Responding to a certified question, the state's high court found that “loser pays” bylaws can be enforceable in non-stock corporations.

In the face of business concerns, the Delaware legislature last year tabled a bill that would have invalidated fee-shifting bylaws.

Mixed Reactions

Among those that oppose the current bill include the U.S. Chamber of Commerce, which earlier this month sent a letter to members of the Delaware Senate urging them to reject the proposed bill.

After the Senate's vote, Lisa A. Rickard, president of the U.S. Chamber Institute for Legal Reform, said in a statement e-mailed to Bloomberg BNA that “[t]oday’s passage by the Delaware State Senate of SB 75 to ban company ‘fee shifting' bylaws without expanding judicial authority to combat meritless and abusive lawsuits threatens Delaware's billion-dollar incorporation franchise.”

She added that “[c]ompanies that incorporate in Delaware have valued the state’s clear and fair corporate law principles. But they are increasingly becoming victims of ‘extortion through litigation.’ In the last four years, 93% of all mergers and acquisitions valued at over $100 million have been challenged by one or more lawsuits.”

On the other side, the Council of Institutional Investors earlier this month sent a letter to Delaware state senators voicing its support for the proposed legislation. 

Additionally, the Alliance for Justice Action Campaign President Nan Aron released a public statement May 12 urging “the Delaware House of Representatives to move swiftly and get this important legislation to Gov. Markell for his signature”

“Today, Delaware has taken an important step towards maintaining the balance between corporate interests and investors’ rights,” Aron said. “The Delaware State Senate’s vote to pass the Delaware General Corporation Law Amendment will preserve shareholders’ access to justice and the ability to keep corporate wrongdoing at bay.”

To contact the reporter on this story: Michael Greene in Washington at mgreene@bna.com

To contact the editors responsible for this story: Kristyn Hyland at khyland@bna.com; Ryan Tuck at rtuck@bna.com