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Delaware Proposal Banning Fee-Shifting and Permitting Exclusive Forum Provisions

Following the unexpected May 2014 decision of the Delaware Supreme Court in ATP Tour Inc. v. Deutscher Tennis Bund, 91 A.3d 554 (Del. 2014), upholding the validity of fee-shifting bylaws of a non-stock corporation, the plaintiffs’ and defense bar in Delaware swiftly prepared legislation to ban such provisions in bylaws and charters. Although passage of the bill had widely been expected, following criticism from the US Chamber of Commerce and some public companies, the issue was tabled until the Delaware legislature’s 2015 session.

On March 6, the Delaware Corporate Council, which typically prepares amendments to the Delaware General Corporation Law (DGCL) for consideration by the Delaware bar and then the state legislature, presented its revised proposal. Under the proposal, Sections 102 and 109(b) of the DGCL would be amended to prohibit bylaw and charter provisions that “would impose liability on a stockholder for the attorneys’ fees or expenses of the corporation or any other party in connection with an intracorporate claim.” The concern expressed by the Council was that fee-shifting provisions that follow the ATP model effectively barred access to the courts. Under theATP formulation, a stockholder is required to pay the corporation’s fees unless the stockholder obtains “a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought.” This sets an extremely high standard that makes it economically irrational for stockholders to pursue fiduciary litigation in view of the likelihood of having to pay the corporation’s substantial legal costs. Like the earlier proposal to ban fee-shifting, the new proposal has drawn sharp criticism from the US Chamber of Commerce, while being praised by the Council of Institutional Investors.

The Council’s proposal does not specifically address the limited universe of Delaware corporations that adopted fee-shifting provisions following the ATP decision. As addressed in Claudia Allen’s article “Fee-Shifting Bylaws: Where Are We Now?” in Corporate Law & Accountability Report, 39 domestic public corporations, of which 30 are incorporated in Delaware, had adopted or proposed adopting such fee-shifting bylaws or charter provisions. Under Section 394 of the DGCL, amendments of the DGCL “shall be a part of the charter or certificate of incorporation of every corporation.” Accordingly if the legislation passes, existing bylaw and charter provisions of Delaware corporations mandating fee-shifting in intracorporate litigation may be void, although the issue is not free from doubt since Delaware generally prohibits ex post facto laws.

As part of its package of proposed amendments, the Council also added a new Section 115 (Forum Selection Provisions) to the DGCL. Under that section, companies would expressly be permitted to include clauses in their charters and bylaws requiring that intracorporate claims be brought exclusively in Delaware courts. While not obvious from the text, because the new section states that “no provision of the certificate of incorporation or the bylaws may prohibit bringing such claims in the courts of [Delaware,]” it would also effectively bar mandatory arbitration bylaws, another controversial bylaw concept directed at the issue of frivolous litigation.

While amendments to the DGCL proposed by the Delaware Council are typically on a glide path to enactment, there is vigorous lobbying on both sides focused primarily upon the fee-shifting ban. It remains to be seen what may ultimately be enacted during the current legislative session, which ends on June 30.

For a related fee-shifting bylaw article in this issue, click here.

©2018 Katten Muchin Rosenman LLP

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