Delaware Governor Signs Bill Prohibiting Bylaws on Fee-Shifting
Last week, Delaware Governor Jack Markell signed Senate Bill 75, which amends the Delaware General Corporation Law to prohibit Delaware stock corporations from adopting bylaws that force shareholders to pay legal fees if they do not prevail in lawsuits asserting internal corporate claims against Delaware corporations. The legislation also allows Delaware corporations to designate Delaware – but not any other state – as the exclusive forum for internal corporate claims.
Section 115 defines “internal corporate claims” as “claims, including claims in the right of the corporation, (i) that are based upon a violation of a duty by a current or former director or officer or stockholder in such capacity, or (ii) as to which this title confers jurisdiction upon the Court of Chancery.”
This legislation has been in the making since May 2014, when the Supreme Court of Delaware held in ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A.3d 554, 555 (Del. 2014), that “fee-shifting provisions in a non-stock corporation’s bylaws can be valid and enforceable under Delaware law.” The new fee-shifting prohibition applies only to stock corporations and does not invalidate the Delaware Supreme Court’s decision in ATP Tour, Inc.
The legislation also puts to rest the question of whether Delaware law allows the board of a Delaware corporation to adopt a bylaw designating an exclusive forum other than Delaware for intra-corporate disputes. The legislation validates the Delaware Court of Chancery’s decision in Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013), which upheld the statutory and contractual validity of a bylaw selecting Delaware as the exclusive forum for such disputes. At the same time, the law invalidates the Court of Chancery’s decision in City of Providence v. First Citizens BancShares, Inc., 99 A.3d 229, 234 (Del. Ch. 2014), which – relying on the analysis in Boilermakers – upheld the validity of a bylaw that designated an exclusive forum other than Delaware for intra-corporate disputes.
The amendments to the DGCL will become effective on August 1, 2015.