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Fee-Shifting and Forum Selection Clauses: Delaware Passes New Legislation

On June 24, 2015, Delaware Governor Jack Markell signed into law amendments to the Delaware General Corporation Law (DGCL). The amendments prohibit fee-shifting clauses in the corporate charters and bylaws of Delaware stock corporations. The amendments also authorize forum selection clauses in corporate charters and bylaws that restrict litigation involving a Delaware corporation to the Delaware courts and prohibit clauses that preclude bringing such litigation in the Delaware courts. The amendments, which become effective August 1, 2015, are a legislative response to various recent decisions by the Delaware courts. Public companies should carefully consider the developments pertaining to fee-shifting and forum selection provisions and respond appropriately.

Fee-Shifting Prohibition

The amendments add Section 102(f) to the DGCL, which provides that a corporation’s charter “may not contain any provision that would impose liability on a stockholder for the attorneys’ fees or expenses of the corporation or any other party in connection with an internal corporate claim ...” The amendments also add a clause to Section 109(b) prohibiting fee-shifting bylaws. A new Section 115 defines “internal corporate claims” as those claims brought by shareholders based on a violation of duty by a current or former director, officer, or shareholder, or claims over which the DGCL confers jurisdiction to the Court of Chancery. The prohibition applies only to fee shifting clauses in charters and bylaws and does not prevent their incorporation in stockholder agreements or stock purchase agreements.

Section 102(f) limits the Delaware Supreme Court’s holding in ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A.3d 554 (Del. 2014), to non-stock corporations. In ATP Tour, the Supreme Court held that absent other invalidating factors (such as adoption for an inequitable purpose), a non-stock corporation’s fee-shifting bylaw was facially valid because it related to the business of the corporation and the conduct of the corporation’s affairs and was not forbidden by the DGCL or any other Delaware statute.

Forum Selection Clauses

New Section 115 authorizes forum selection clauses that require certain claims to be tried in Delaware courts (including federal courts) but prohibits clauses that would preclude the claims being tried in Delaware courts. Section 115 effectively codifies the Delaware Chancery Court’s 2013 decision in Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013), which held that a bylaw limiting the jurisdiction for internal corporate litigation to the Delaware courts was facially valid. The amendments reject the Chancery Court’s holding in City of Providence v. First Citizens BancShares, Inc., C.A. No. 9795-CB (Del. Ch. 2014). In City of Providence, the Chancery Court upheld a Delaware corporation’s bylaw limiting the jurisdiction for internal corporate disputes, including derivative claims and claims of breach of fiduciary duty, to the state of the corporation’s headquarters (North Carolina).

Other Amendments

Other amendments passed into law on June 24, 2015 address the ratification of certain defective corporate acts that would otherwise be void or voidable due to a failure of authorization. The amendments to DGCL Section 204 clarify the procedures for authorizing such acts, including the requirements for a board of directors to ratify a defective act, the information that must be included in a certificate of validation, and the requirements for providing notice of such a ratification.

Additionally, DGCL Sections 152 and 157 were amended to provide that extrinsic facts, such as market prices, can be taken into consideration when determining the price at which stock can be issued upon authorization by a company’s board of directors or upon the exercise of rights and options. Amended Section 152 also allows the board of directors to authorize the issuance of stock in one or more transactions, at such times and in such numbers as may be determined by a person other than the board of directors, provided that the authorizing board resolution limits the number of shares, the time period in which the shares may be issued, and the minimum consideration for which the shares may be issued.

Alexander Young , Jason Zgliniec , F. Alec Orudjev  and Cavas Pavri also contributed to this article.

© 2022 ArentFox Schiff LLPNational Law Review, Volume V, Number 182
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Ralph DeMartino Schiff Hardin Corporate Lawyer
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For more than 30 years, Ralph V. De Martino has devoted his practice to the representation of public and private companies, the officers and directors who serve them, and financial institutions, broker-dealers and associated members. Mr. De Martino is distinguished among his peers in matters involving public and private company capital formation, securities offerings, regulatory inquiries and enforcement proceedings, internal investigations, and corporate finance and governance matters. He regularly appears before the U.S. Securities and Exchange Commission, FINRA and securities...

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David P. McHugh Corporate Attorney Schiff Hardin
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David McHugh doesn’t simply represent his clients – he becomes part of their executive team. Drawing on his experience counseling a wide range of companies, from startups to Fortune 500 businesses, David crafts legal strategy with a singular goal: achieving his clients’ business objectives. Regularly serving as outside general counsel to public and private companies both inside and outside of the United States, David collaborates with the firm’s other practice groups to find practical, forward-thinking solutions. Many of David’s former colleagues have become clients, relying on him for his...

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Robert Minkus, Corporate Attorney, Schiff Hardin Law Firm
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Robert Minkus focuses his work on mergers and acquisitions and issues of public disclosure. His practice also includes general corporate and corporate finance matters.

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