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June 11 — Delaware is on the verge of enacting legislation that would restrict the ability of stock corporations to adopt “loser pays” bylaws or charter provisions.
The state House late June 11 unanimously passed SB 75, which would, among other things, invalidate fee-shifting provisions in stock corporations and endorse Delaware exclusive forum selection clauses.
The House passed the bill 40-0 (with one absent). Last month, the Delaware Senate passed the bill, primarily sponsored by Sen. Bryan Townsend (D-Newark), 16–5, after rejecting an amendment proposed by Gary Simpson (R-Milford).
While the bill still needs Gov. Jack Markell's (D) signature, a spokesperson for the governor told Bloomberg BNA in an e-mail June 11 that Markell intends to sign the bill into law.
With minor changes, SB 75 tracks a proposals by the Delaware State Bar's Corporation law section.
Unlike in the Senate, there was not much debate on the House floor June 11.
Richard J. Geisenberger, Delaware’s chief deputy secretary of state, was the only person to speak before the House's vote, and he endorsed the proposed legislation.
Noting that his office focuses on making the state competitive, he conceded that “I can't stand here and say that not a single corporation would be lost as a result of this bill.”
However, he found that SB 75 properly balances the interest of shareholders and managers of corporations. There might be corporations that want to prevent their shareholders from bringing litigation to enforcing fiduciary duties, he said, adding that he is confident that responsible companies that want to be attractive for raising capital would not want to do that.
He also added that the greater risk to Delaware is if this bill is not passed, because it creates a vacuum that some other jurisdiction would fill, including the federal government. “That is the greatest competitive risk to Delaware that the federal government would step in to create national corporate law for publicly traded companies.”
Fee-shifting bylaws have been a topic of controversy since the Delaware Supreme Court's May 2014 opinion in ATP Tour Inc. v. Deutscher Tennis Bund. Therein, 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.
In the face of business concerns, the Delaware legislature last year tabled a similar bill that would have invalidated fee-shifting bylaws.
Critics claim that SB 75 would eliminate an important mechanism that corporations invoke to protect innocent shareholders against the costs of abusive litigation. Among those that oppose the current bill include the U.S. Chamber of Commerce, which last month sent a letter to members of the Delaware Senate urging them to reject the proposed bill. In a statement to Bloomberg BNA earlier this month, the chamber reiterated its criticism.
Many have raised concerns about the significant number of lawsuits arising out of M&A 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.
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