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By Michael Greene
March 31 — Delaware Supreme Court Chief Justice Leo E. Strine Jr. March 30 said that he supports the Delaware State Bar's Corporation Law Council proposal that would invalidate fee-shifting bylaws and charters that allow stock corporations to recoup litigation expenses from unsuccessful plaintiffs.
“I worry about the courts picking and choosing [which types of bylaws are appropriate],” he said during the Council of Institutional Investor's spring 2015 conference. “I don't worry about our General Assembly picking and choosing because they are ones who are elected to do this.”
He said that when the market innovates in a way that is believed to be counterproductive, it is “perfectly reasonable” for the legislature to act.
The council's proposal to invalidate “loser pays” bylaws was provoked in large part by the Delaware Supreme Court's May 2014 decision in ATP Tour Inc. v. Deutscher Tennis Bund, which found that fee-shifting provisions in the bylaws of a Delaware non-stock corporation can be enforceable.
Since ATP Tour, both plaintiffs' firms and academics have raised concerns over whether such provisions would effectively deter all stockholder litigation. That debate has been fueled by almost 40 companies enacting provisions by early 2015, according to research by Claudia H. Allen, a partner and co-chair of the corporate governance practice at Katten Muchin Rosenman LLP.
The high court's decision may have had some unexpected consequences, according to Chief Justice Strine.
ATP Tour caught the corporate community by surprise partially because the decision was made in response to a certified question, he said. There may have been ill-advised rush by some companies to react to this decision.
The court concluded that the fee-shifting bylaw in ATP Tour dealt with internal affairs and was consistent with the statute, he said. “We didn’t say it was smart for public companies to adopt these provisions.”
Strine noted that there is not a separate Delaware General Corporation Law for stock and non-stock corporations, nor is there one that distinguishes between public and non-public corporations.
“I never contemplated fee-shifting in a public company context. It is something that never really occurred to me,” he said.
While Strine said that in the context of member corporations a fee-shifting provision could make a lot of sense, such provisions do not make sense for public companies to adopt.
Chief Justice Strine also discussed concerns that the Bar council's proposal would not preclude companies from adopting fee-shifting provisions in the context of federal securities litigation.
According to a recent article by John C. “Jack” Coffee, Jr., a professor at Columbia Law School and director of the school's Center on Corporate Governance, because the proposal only bars fee-shifting bylaws and charters “in connection with an intracorporate claim,” the new legislation could be read not to apply to certain types of federal securities class actions.
“I would imagine that was more of a question of Delaware being modest,” Strine said, adding that regulating the internal affairs of a corporation really is Delaware's domain, via the DGCL.
He added that there are federal supremacy issues regarding fee-shifting in securities claims and that he didn't believe that anyone contemplated that Delaware could enable fee-shifting in this context if it is prohibited under federal securities laws.
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The fee-shifting and forum selection proposal is available at http://op.bna.com/ccw.nsf/r?Open=sbon- 9v5qmg.
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