Delaware Legislation Banning Fee-Shifting in Bylaws and Charters

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In a swift response to the Delaware Supreme Court’s May 8 opinion holding that fee-shifting bylaws are facially valid (ATP Tour v. Deutscher Tennis Bund), members of the Delaware bar, representing both plaintiffs and corporations, proposed legislation that would effectively overturn the application of the decision to stock corporations. The policy concerns are that fee-shifting provisions would undermine the limited liability associated with an investment in stock, and “loser-pays” clauses could result in a significant decrease in the number of meritorious (as well as frivolous) cases filed in Delaware, thereby negatively affecting Delaware’s preeminence in the field of corporate law. Notably, the amendments are not limited to fee-shifting provisions. Rather, they generally bar clauses in bylaws and certificates of incorporation imposing liability on stockholders.On May 29, the Corporation Law Section of the Delaware State Bar Association approved the amendments, which have a proposed effective date of August 1. If subsequently approved by the Executive Committee of the Bar Association, the amendments will go to the state legislature. The legislature customarily follows the recommendations of the Bar Association and enactment is widely expected. 

While fee-shifting in organizational documents would be barred by the amendments, ATP Tour nonetheless represents an effective endorsement by the Delaware Supreme Court of the Delaware Chancery Court’s opinion in Boilermakers, upholding the validity of board-adopted exclusive forum bylaws. Exclusive forum bylaws and charter provisions, which require that stockholder class actions and other intra-corporate claims be brought exclusively in specified forums (typically Delaware courts for Delaware corporations), also target the phenomenon of frivolous litigation, but without the specter of additional liability. While the adoption and enforcement of board-adopted forum bylaws are subject to situational challenge, such provisions have increasingly been enforced by courts in other states, including California, Illinois, Louisiana, New York and Texas.  

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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