Del. Bar Section OKs Limits on Fee-Shifting; Law Firms Malign Appraisal Amendments

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By Michael Greene

April 9 — The Delaware State Bar's Corporation Law Section April 9 approved two potentially significant legislative amendments related to fee-shifting and forum selection provisions, according to Norman Monhait, chairman of the section and shareholder with Rosenthal, Monhait & Goddess, P.A.

The proposed amendments, which restrict the ability of corporations to adopt fee-shifting bylaws and charter provisions and also validate Delaware exclusive forum selection provisions, must still be approved by the executive committee of the section; then, after a legislative sponsor introduces them, the General Assembly would vote on them.

The fee-shifting and forum selection proposals, along with proposed amendments to the state's appraisal statute, are part of a package of legislation introduced last month that is aimed at curbing abusive litigation tactics while protecting the fundamental right of stockholders to file lawsuits. 

The executive committee and the section last month approved the appraisal amendments, which still need a legislative sponsor. In a April 1 letter to committee members, seven law firms argued that the amendments do not adequately address concerns that the appraisal statute is being abused.

‘ATP Tour.'

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

Since ATP Tour, no court has resolved a case testing the facial validity of a fee-shifting provision. Last month, the chancery court sidestepped arguments about the general validity of a post-ATP Tour fee-shifting bylaw and found it unenforceable based on the timing of its enactment.

Among the supporters of the proposed limitation are Delaware Supreme Court Chief Justice Leo E. Strine Jr, who recently stated that it's “perfectly reasonable” for the General Assembly to pick and choose what type of bylaws are appropriate. The Chief Justice additionally stated he believed exclusive forum selection clauses can help align the cost-benefit ratio of litigation so that only lawsuits of real value are brought.

Inadequate Response

However, the proposed legislation also has been the subject of controversy, with critics questioning the council's motivation for the amendments and claiming that they would do little to prevent meritless litigation.

In the April 1 letter, the law firms argued that the proposed amendments to the state's appraisal statute—Delaware General Corporation Law §262—don't go far enough to prevent abuse.

The law firms state that two recent chancery court decisions have opened the door to appraisal arbitrage and that tighter restrictions are needed.

“The minimum appropriate solution, and one entirely consistent with both the legislative intent and Delaware case law, is to amend the statute to make express that appraisal rights are not available to shareholders with no right to vote on—and therefore dissent from—the transaction. We believe that strong equitable arguments can be made to deny appraisal rights to anyone purchasing after public announcement of a transaction, but at a minimum there is no justification for permitting holders who purchased their shares after the record date for the vote to seek appraisal as if they were ‘dissenters,'” the letter states.

The law firm signatories are: Cravath, Swaine & Moore LLP; Davis Polk & Wardwell LLP; Latham & Watkins LLP; Skadden, Arps, Slate, Meagher & Flom, LLP; Simpson Thacher & Bartlett LLP; Sullivan & Cromwell LLP; and Wachtell, Lipton, Rosen & Katz.

Lawrence A. Hamermesh, a professor at Widener University School of Law, and Monhait, the members of the council to whom the letter is addressed, declined to comment on the letter.

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

To contact the editor responsible for this story: Ryan Tuck at rtuck@bna.com

The fee-shifting and forum selection proposal is available at http://op.bna.com/car.nsf/r?Open=mgre-9ufsfe.

The proposed appraisal amendments are available at http://op.bna.com/car.nsf/r?Open=mgre-9ufsbs.