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June 24 — Delaware Gov. Jack Markell (D) June 24 signed legislation that restricts the ability of stock corporations to adopt “loser pays” bylaws or charter provisions.
Primarily sponsored by Sen. Bryan Townsend (D-Newark), SB 75 will, among other things, invalidate fee-shifting provisions in stock corporations and endorse Delaware exclusive forum selection clauses. Both of those components will go into effect Aug. 1.
With minor changes, SB 75 tracks a proposal by the Delaware State Bar's corporation law section.
Also in the bill are less-controversial changes to the Delaware General Corporation Law, including amendments that will make it easier for public corporations to become benefit corporations and to clarify the requirements for ratifying defective corporate acts.
Earlier this month the Delaware House unanimously passed SB 75.
In May, the Delaware Senate passed the bill 16–5, after rejecting an amendment proposed by Gary Simpson (R-Milford) that would have deleted the fee-shifting and forum selection provisions.
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. In that case, responding to a certified question, the state's high court found that “loser pays” bylaws can be enforceable in non-stock corporations.
Since the supreme court's decision, concerns have been raised about whether these types of bylaws effectively prevent shareholders from bringing derivative claims. According to a list compiled by Lee D. Rudy, Kessler Topaz Meltzer & Check LLP, more than 50 publicly traded companies have adopted fee-shifting bylaws in the wake of ATP Tour.
Corporate bylaw and charter provisions that restrict the litigation rights of shareholders have been a lightning rod of controversy in the corporate community.
In the face of business concerns, the Delaware legislature last year tabled a similar bill that would have invalidated fee-shifting bylaws. Critics of SB 75 claim that it eliminates an important mechanism that corporations invoke to protect innocent shareholders against the costs of abusive litigation. Among those that opposed the bill included the U.S. Chamber of Commerce.
In a June 25 statement, Lisa A. Rickard, president of the U.S. Chamber Institute for Legal Reform, said: “We are disappointed that Delaware chose not to enact measures to deter abusive merger-and-acquisition lawsuits while prohibiting an important and useful tool for combating these unjustified lawsuits.”
Many have raised concerns about the significant number of lawsuits arising out of mergers and acquisitions deals, with companies enacting litigation reform measures such as fee-shifting bylaws in response. According to a Feb. 25 report by Cornerstone Research, stockholders challenged 93 percent of M&A deals valued at more than $100 million in 2014.
In her June 25 statement, Rickard said that in passing SB 75, Delaware has “effectively authorized consolidation of much of merger-and-acquisition litigation in its own courts and promised the business community that its system will not tolerate lawsuit abuse and will fairly and actively weed out frivolous shareholder cases. The business world will be watching carefully to see if that promise holds true.”
Proponents claim that SB 75 strikes a balance between curbing abusive litigation tactics and protecting the fundamental right of stockholders to file lawsuits, citing that the bill also sanctions exclusive forum provisions.
According to a client alert from Gibson Dunn & Crutcher LLP's “M&A Report,” a growing number of corporations are making exclusive forum selection bylaws a staple of managing multi-jurisdictional litigation that arises from M&A deals.
Practitioners have told Bloomberg BNA there might not be many drawbacks to adopting such provisions.
Going forward, many questions remain regarding fee-shifting bylaws, including whether they are enforceable in securities actions. According to John C. “Jack” Coffee, Jr., a professor at Columbia Law School and director of the school's Center on Corporate Governance, because SB 75 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.
It also remains to be seen whether other states will follow Delaware's lead. In November 2014, Oklahoma became the first state to enact legislation mandating the shifting of fees in derivative lawsuits.
And while SB 75 limits Delaware stock corporations from enacting fee-shifting provisions, corporations have other tools at their disposal to potentially limit litigation.
Other measures enacted recently include a minimum ownership provision by Imperial Holding Inc., which is being challenged in federal court.
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