June 19, 2019

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Delaware House Passes Bill Prohibiting Bylaws on Fee-Shifting

Yesterday, the Delaware House of Representatives unanimously passed a bill prohibiting publicly traded 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 bill would also allow Delaware corporations to designate Delaware – but not any other state – as the exclusive forum for internal corporate claims.  The Delaware Senate passed the same bill last month, as we reported here.  The bill now heads to Governor Jack Markell for signature.

Click here to view a copy of the legislation, which was passed as introduced.

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 legislation would also put 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. In City of Providence v. First Citizens BancShares, Inc., 99 A.3d 229, 234 (Del. Ch. 2014), the Delaware Court of Chancery – relying on the analysis in an earlier case, Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013) – upheld the validity of a forum selection bylaw that designated an exclusive forum other than Delaware for intra-corporate disputes. The Chancery Court explained that “nothing in the text or reasoning of [Boilermakers] can be said to prohibit directors of a Delaware corporation from designating an exclusive forum other than Delaware in its bylaws.”

We will keep you apprised of further developments concerning the use of bylaws to define the bounds of shareholder litigation.

© 2019 Proskauer Rose LLP.

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About this Author

Jonathan E Richman, Proskauer Rose law firm, litigation attorney
Partner

Jonathan Richman is a Partner in the Litigation Department and a co-head of the Securities Litigation Group. Jonathan has broad experience in a range of civil litigation matters, including securities litigation and investigations, shareholder derivative litigation, insurance sales-practices suits, antitrust litigation, bankruptcy proceedings, product-liability litigation, and employment and ERISA suits.

212-969-3448
Rachel O. Wolkinson, Securities Litigation Attorney, Proskauer Law Firm
Associate

Rachel Wolkinson is an associate in the Litigation Department. Her practice focuses on complex litigation matters, including securities litigation and investigations, shareholder derivative litigation, and civil enforcement proceedings. She has represented companies in anti-corruption investigations due diligence and has advised companies on the development of Foreign Corrupt Practices Act and Office of Foreign Assets Control compliance programs.

Rachel represents clients in many different industries, including financial institutions, and energy and technology companies.

In addition, Rachel has represented many pro bono clients in the areas of social security disability benefits, asylum and family custody disputes.

202-416-5811