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By Michael Greene
Jan. 12 — The Delaware Supreme Court's decision upholding the facial validity of fee-shifting bylaws “represents a radical and unjustifiable shift in the nature of corporate law,” according to Jan. 8 paper by J. Robert Brown Jr., a professor at the University of Denver Sturm College of Law.
In his paper, “Shifting Back the Focus: Fee Shifting Bylaws and a Need to Return to Legislative Intent,” Brown claims that the high court's decision in ATP Tour Inc. v. Deutscher Tennis Bund “overturned longstanding core principles of corporate law without any meaningful authority or analysis.”
“The decision imposed unacceptable financial risk on shareholders (and “prior” shareholders), … and provided the federal government with an incentive to intervene in the corporate governance process, further eroding Delaware’s historic leadership in the field,” he writes.
Although Brown notes that the Supreme Court has not expressly applied its analysis to public companies, fee-shifting bylaws are becoming increasingly popular as a potential weapon to limit shareholder lawsuits; according to Brown, as of December 2014, more than 50 public companies have fee-shifting provisions in place.
Brown cites several reasons why ATP Tour overturns the “carefully constructed framework put in place by the Delaware legislature.”
Notably, he claims that the court rewrote § 109 of the Delaware General Corporation Law by characterizing bylaws as contracts.
“Bylaws in the public company arena are not contracts,” he argues.
In illustrating this point, Brown writes: “Contracts require consent and consideration; bylaws do not. Contracts are subject to a duty of good faith and fair dealing, bylaws are not. Bylaws are reviewed under the duty of care and loyalty, contracts are not.”
In addition, Brown writes that fee-shifting bylaws have “the capacity to eliminate or restrict inherent rights granted to shareholders by Delaware legislature,” such as the right to obtain access to corporate books and records.
Brown believes that legislative action is the solution to the problems created by ATP Tour. In particular, in his view: “The argument for federal intervention is strong.”
He states that the Securities and Exchange Commission can invoke its authority to restrict practices by boards of directors.
Accordingly, Brown writes that the SEC could decline to accelerate registration statements for companies that have fee-shifting bylaws, which has been raised by others.
However, Brown claims that “[t]he most obvious and effective solution would be for the Delaware legislature to intervene and reinstate the law as it was before the ATP decision.”
After a bill last session stalled in response to business concerns, the Delaware General Assembly is scheduled to take up a bill this month that would prohibit all “loser pays” bylaws.
Meanwhile, in what could be the first actual test of ATP Tour, the plaintiff in an ongoing Delaware Chancery Court class action lawsuit is challenging the applicability of a fee-shifting bylaw on the grounds that his ownership interest was extinguished before the bylaw was unilaterally adopted. Briefing is expected to be completed by February.
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The paper is available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2547094.
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