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June 30 — Recently enacted Delaware legislation that prohibits stock corporations from adopting “loser pays” bylaws and charters “in connection with an intracorporate claim” does not authorize such provisions in federal securities class actions, according to two members of the Delaware State Bar's Corporation Law Council.
Norman Monhait, immediate past chairman of the council and shareholder with Rosenthal, Monhait & Goddess P.A., and Lawrence A. Hamermesh, a professor at Widener University School of Law and prior chair and member of the council, disagreed with suggestions that fee-shifting in federal class actions was implicitly endorsed or at least remains viable in Delaware after the bill.
In a June 29 blog post, the authors wrote that even though recent Delaware decisions establish that bylaws are “flexible contracts,” the Delaware General Corporation Law did not before or after the new bill sanction fee-shifting in securities litigation.
“Given our views of Delaware law, we saw no reason for a statutory amendment that purported to reach beyond the confines of internal governance litigation,” the post states.
Last week, Delaware Gov. Jack Markell (D) signed legislation that will, among other things, restrict the ability of stock corporations to adopt “loser pays” bylaws or charter provisions and endorse Delaware exclusive forum selection clauses. With minor changes, SB 75 tracks a proposal by the Delaware State Bar's corporation law section.
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.
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.
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