Proposal Would Nullify Fee-Shifting Bylaws In Delaware Stock Corp. Bylaws, Charters

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By Michael Greene

March 9 — Responding to a divisive 2014 Delaware Supreme Court opinion, the Delaware State Bar's Corporation Law Council has proposed long-expected legislation to restrict the ability of corporations to adopt fee-shifting bylaws or charter provisions.

The March 6 proposed bill, which picks up from a tabled proposal during the 2014 legislative session, also endorses Delaware forum selection provisions.

If passed, the bill would invalidate fee-shifting provisions that allow stock corporations to recoup litigation expenses from unsuccessful plaintiffs.

The proposal, however, would still allow fee-shifting provision to be enforced in non-stock corporations, which is what the Delaware Supreme Court has conceptually endorsed, and would not prevent application of “losers pay” provisions included in stockholder agreements

In addition, the council also proposed amendments to Delaware General Corporation Law §262 to address concerns that Delaware's appraisal statute is being abused.

The proposed amendments to § 262 will be considered at the Delaware State Bar's Corporation Law Section meeting March 13, while the fee-shifting and forum selection proposals are expected to be considered at a section meeting to be scheduled in early April.

Fee-Shifting

Responding to a certified question in May 2014, the Delaware Supreme Court in ATP Tour Inc. v. Deutscher Tennis Bund found that fee-shifting provisions in the bylaws of a Delaware non-stock corporation can be enforceable.

Since the Supreme Court's decision, fee-shifting bylaws have proven to be a lightning rod for controversy in the corporate community, with both plaintiffs' firms and academics raising concerns regarding the impact of such bylaws on stockholder actions. 

A plaintiff in an ongoing Delaware Chancery Court class action lawsuit is challenging the applicability of a fee-shifting bylaw.

According to its explanation of the legislative proposal, the council believes that absent legislation, many corporations will adopt fee-shifting provisions. The council further states that widespread adoption of these types of provisions would effectively eliminate stockholder litigation that is essential to the enforcement of statutory and fiduciary obligations.

Likely to Pass

Professor Charles Elson, director of the University of Delaware's John L. Weinberg Center for Corporate Governance, told Bloomberg BNA March 9 that he believes the proposed legislation will pass. He also stated that in most circumstances, there is a better way to prevent abusive litigation than fee-shifting provisions in bylaws and charters.

Jeff Mahoney, the Council of Institutional Investors' general counsel, in a statement e-mailed to BBNA said that limiting the scope of ATP Tour benefits long-term investors and Delaware.

“Long-term investors benefit because the accountability of Delaware stock corporations to their owners would no longer be diminished by the existence of fee shifting provisions that effectively eliminate shareowner rights,” he said. “Moreover, the State of Delaware would benefit by maintaining the State’s long-standing leadership role as the preeminent adjudicator of business dispute—a role that would be at risk if the ATP Tour decision is not remedied by the legislature.”

In December 2014, CII asked the Delaware State Bar to formulate and recommend a proposal to the Delaware General Assembly that would either overturn or narrow ATP Tour.

Chamber Opposition

However, not everyone is endorsing the council's proposals. “The Delaware Bar Association’s list of recommendations is a huge win for Delaware's lawsuit business at the expense of shareholders in Delaware companies. Their proposal does precious little to solve the broadly-recognized problem of abusive mergers and acquisitions litigation, while taking away the fee-shifting approach some companies have used to combat it” said Lisa A. Rickard, president of the U.S. Chamber Institute for Legal Reform, in a statement e-mailed to BBNA.

“The only guaranteed winners will be Delaware lawyers—who've effectively strengthened their grip over these M&A lawsuits—at the expense of Delaware's corporate law franchise,” she added.

Largely because of opposition from the business community, the Delaware State Senate in January 2014 tabled a bill that would have prohibited loser pays bylaws. The bill's sponsor, state Sen. Bryan Townsend (D-Newark), has not responded to requests for comment about whether he would reintroduce a similar bill this legislative session.

Forum Selection

The council proposal also would validate exclusive forum selection provisions included in a corporation's bylaws and charter by confirming the Delaware Supreme Court's holding in Boilermakers Local 154 Retirement Fund v. Chevron Corp.

The proposal, however, would also preclude Delaware corporations from adopting such provisions if they prevent litigating claims in Delaware courts, which appears to overturn a recent chancery court ruling applying the Boilermakers decision.

In FAQs that accompanied the proposed legislation, the council states the it “believes that stockholders of Delaware corporations should not be denied access to the protections of Delaware courts.” It further states “the value of Delaware as a favored jurisdiction of incorporation is dependent on a consistent development of a balance of corporate law, and that the Delaware courts are best situated to continue to oversee that development.”

Appraisal Arbitrage Amendment

The council is also proposing two modifications to Delaware's appraisal statute.

The first would create a de minimis exception that would limit appraisal claims in public company transactions.

The second modification would provide corporations with the option of limiting the accrual of interest on appraisal awards.

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

The fee-shifting and forum selection proposal is available at http://op.bna.com/car.nsf/r?Open=mgre-9ufsfe.

The proposed appraisal amendments are available at http://op.bna.com/car.nsf/r?Open=mgre-9ufsbs.

The council's explanation of its fee-shifting and forum selection proposal is available at http://op.bna.com/car.nsf/r?Open=mgre-9ufsdb.

A summary of the proposed appraisal amendment is available at http://op.bna.com/car.nsf/r?Open=mgre-9ufseh.

The FAQs are available at http://op.bna.com/car.nsf/r?Open=mgre-9ufs9w.