Fee-Shifting Bill Sails Through Delaware House Comm.; House Vote Likely Next Week

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By Michael Greene

June 4 — The Delaware House Judiciary Committee June 3 reported out a bill that seeks to restrict the ability of corporations to adopt “loser-pays” bylaws or charter provisions, with all 11 committee members voting on the merits.

Among other things, SB 75 would invalidate fee-shifting provisions in stock corporations and endorse Delaware exclusive forum selection clauses.

House Judiciary Committee Chairman John L. Mitchell Jr. (D-Elsmere) told Bloomberg BNA June 3 that “[t]he committee fully supported the release of this bill today and [it] probably will be on the agenda next week for a full House debate and vote.”

Vice Chairman Melanie George Smith (D-Bear/Newark) said she expects the House to consider the bill June 9. She told BBNA June 4: “I expect the legislation to pass because it is a good bill.”

With minor changes, SB 75 tracks a Delaware Bar Corporation Law Section package, which also contained proposed amendments to Delaware's appraisal statute.

Sen. Bryan Townsend (D-Newark), the primary sponsor of the bill, told BBNA June 3 that it is unclear whether legislation will be introduced this session regarding the appraisal amendments or will wait for “more comprehensive legislation for next year.”

Ready List

Last month, the Delaware Senate passed the fee-shifting bill 16–5, after rejecting an amendment proposed by Gary Simpson (R-Milford).

SB 75 still needs to be approved by the full state House before it can reach Gov. Jack Markell's (D) desk. As of this publication, the bill has been placed on the House's “Ready List” and is not on the House agenda, according to the General Assembly website.

Controversial Bylaws

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 certain types of 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 June 3, 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.

Appraisal Amendments

The Delaware Bar section's proposal also would amend Delaware General Corporation Law §262 to address concerns that the appraisal stature is being abused.

The first modification seeks to eliminate “nuisance” appraisal claims by creating a de minimis exception that would limit such claims in public company transactions. The second modification would provide corporations with the option of limiting the accrual of interest on appraisal awards.

In an April letter, law firms argued that the proposed amendments don't go far enough to prevent abuse.

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


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