Investor Group Joins Chorus Against Fee-Shifting Bylaws, Asks Del. Bar to Act

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By Michael Greene

Nov. 26 — The Council of Institutional Investors says that Delaware's “well-deserved reputation for fair principles of corporate law” may be at risk if the state's legislature does not overturn or narrow a recent court decision that allows corporations to unilaterally adopt fee-shifting bylaws.

In a Nov. 25 letter, CII said that “if corporations are allowed to continue to unilaterally adopt fee-shifting provisions under the authority of the ATP Tour decision, the Delaware judiciary’s leadership role will diminish over time as fewer important business disputes will be brought before Delaware courts.”

CII asks the Delaware State Bar Association to formulate and recommend a proposal to the Delaware General Assembly that would either overturn or narrow the Delaware Supreme Court's decision in ATP Tour Inc. v. Deutscher Tennis Bund.

Insulated & Unaccountable

Responding to a certified question in May in ATP Tour, the Delaware Supreme Court found that fee-shifting provisions in the bylaws of a Delaware non-stock corporation can be enforceable.

According to CII's letter, this decision could cause a decline in corporate accountability to long-term shareholders and leave corporate officials more insulated from meritorious legal challenges.

“Simply put, the ATP Tour decision is bad for Delaware and bad for long-term investors. We, therefore, respectfully request that the Section promptly formulate and recommend to the DGA amendments to the DGCL that would overturn or narrow the decision,” the letter states.

Jeff Mahoney, CII's general counsel, told Bloomberg BNA that the association remains optimistic about potential action. He added that actions by the Delaware legislature and the Securities and Exchange Commission “could be very positive with respect to [preventing] other jurisdictions and companies from adopting these types of provisions.”

John C. “Jack” Coffee, Jr., a professor at Columbia Law School and director of the school's Center on Corporate Governance, told the SEC Investor Advisory Committee Oct. 9 that, among the ways to prevent the “chilling effect” of these bylaws, the SEC could refuse to accelerate registration statements for the companies that enact certain fee-shifting provisions. In an Oct. 29 letter, Sen. Richard Blumenthal (D-Conn.) asked the SEC to take action regarding fee-shifting bylaws.

“It is pretty clear that this not a good corporate governance practice and doesn't enhance the accountability of management and directors to shareholders,” Mahoney said.

‘ATP Tour' and Aftermath

Fee-shifting, or “loser pays,” bylaws have been a lightning rod since the ATP Tour decision. Both plaintiffs' firms and academics have raised concerns regarding the impact of such bylaws, which an estimated 35 companies have adopted.

A legal challenge to one such bylaw is ongoing in the Delaware Chancery Court and the Delaware General Assembly is scheduled to take up a bill in January that would prohibit all such bylaws—after tabling a bill last year in response to business concerns.

Recently, proxy adviser Institutional Shareholder Services, Inc. updated its benchmark voting policies to include general policy to “vote against bylaws that mandate fee-shifting whenever plaintiffs are not completely successful on the merits (i.e., in cases where the plaintiffs are partially successful).”

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CII's letter is available at