Delaware Delays Consideration of Proposed Prohibition on Fee-Shifting Bylaws for Delaware Stock Corporations

As noted in our prior alert,¹ the Delaware General Assembly (DGA) was recently presented with proposed amendments to the Delaware General Corporation Law (DGCL) that would prohibit the adoption of a fee-shifting provision by Delaware stock corporations in their charters or bylaws effective August 1, 2014. The amendments were proposed in response to the Delaware Supreme Court’s ATP Tour, Inc. v. Deutscher Tennis Bund decision ²  upholding the facial validity of a bylaw provision adopted by a non-stock corporation shifting attorneys’ fees and expenses to unsuccessful plaintiffs in intra-corporate litigation. 

Apparently in response to requests from the U.S. Chamber Institute for Legal Reform and other members of the business community to defer approval of the proposed amendments to allow further debate on the amendments’ impact and to consider whether other responses could be taken to allow Delaware stock corporations to reap some of the benefits created by the ATP Tour decision, last week the Delaware State Senate passed a joint resolution asking for continued examination of the proposed amendments relating to fee-shifting bylaws and other aspects of corporate litigation.³ The bill containing the proposed amendments has been withdrawn to allow for further examination and consideration during the DGA’s next session, likely to occur in early 2015.

Delaware Stock Corporations Should Take Little Comfort in Delay

The delay may allow interested parties to be heard and allow the DGA to consider the merits of a more balanced response to the ATP Tour decision, such as tailoring the amendments to include situations where fee-shifting provisions should be permitted. However, the resolution’s preamble suggests that the DGA generally supports the proposed DGCL amendments by noting that they “strongly support a level playing field that provides the ability for stockholders and investors to seek relief on its merits in the [Delaware State] Courts…and believe that a proliferation of broad fee-shifting bylaws for stock corporations will upset the careful balance that [Delaware] has strived to maintain between the interests of directors, officers, and controlling stockholders, and the interests of other stockholders.” In addition, the bill’s sponsor, Sen. Bryan Townsend, noted “I certainly believe that we should not permit companies carte blanche to adopt these kinds of bylaws.”⁴

The resolution calls on the Delaware State Bar Association, its Corporate Law Section and the Council of its Corporate Law Section⁵ to:

• examine the permissible scope of provisions of the charter, bylaws or other similar business entity documents affecting:
  • the conduct of and forum for litigation involving claims under Delaware’s business entity laws;
  • the operation and administration of the statutes and court rules governing appraisal rights; and
  • the rate of interest on any fair value determination in an appraisal;
• consider whether legislation that is similar to, or that modifies, limits or expands, the proposed DGCL amendments relating to fee-shifting provisions would be appropriate; and
• submit for consideration during the next DGA session any legislative proposals “deemed meritorious in continuing and promoting the adoption and use of [Delaware]’s business entity laws by corporations and their investors.”

Although the proposed DGCL amendments relating to fee-shifting bylaws prompted the resolution, the resolution may result in a more comprehensive legislative proposal relating to other aspects of stockholder litigation, including, for example, appraisal rights and forum-selection.

What Now?

Although the proposed amendments have been delayed and may ultimately be modified, Delaware stock corporations should heed the warning found in the resolution that any fee-shifting charter or bylaw provisions adopted before the next DGA session may be invalidated by subsequently-enacted legislation. These corporations should voice their concerns to the DGA or the Delaware State Bar Corporate Law Section in the hope that any legislation adopted in the next DGA session reflects their interest in stemming the tide of questionable stockholder litigation, especially the litigation that is nothing more than a so-called “transaction tax” on public company merger and acquisition transactions. 

1. Please see our client alert dated June 2, 2014, Proposed Legislation Would Prohibit Fee-Shifting Bylaws for Delaware Stock Corporations.

2. No. 534, 2013, 2014 WL 1847446 (Del. May 8, 2014), available at http://courts.delaware.gov/opinions/download.aspx?ID=205490. For a discussion of the Court’s decision, please see our client alert dated May 15, 2014, Delaware Supreme Court Finds Fee-Shifting Bylaw Permissible.

3. See Delaware State Senate 147th General Assembly, Senate Joint Resolution No. 12 (Jun. 18, 2014), available at http://legis.delaware.gov/LIS/lis147.nsf/vwLegislation/SJR+12/$file/legis.html.

4. Liz Hoffman, Delaware Fight over Corporate Legal Bills On Hold, WALL ST. J. L. BLOG  (Jun. 18, 2014, 7:18 pm), http://blogs.wsj.com/law/2014/06/18/delaware-fight-over-corporate-legal-bills-on-hold/.

5. The Council of the Corporate Law Section of the Delaware State Bar Association (DSBA) is responsible for formulating and recommending to the DGA, after approval by the DSBA, amendments to the DGCL.