The Delaware Senate has passed a bill that would amend the Delaware General Corporation Law (DGCL) to prohibit Delaware stock-based companies from adopting bylaws or articles of incorporation that shift legal fees to the losing party in shareholder litigation.
Senate Bill (S.B.) 75, approved by the Senate on May 12, also confirms a company’s right to adopt forum-selection clauses that establish Delaware as the exclusive venue for any shareholder litigation. S.B. 75 does not prevent the inclusion of fee-shifting provisions in stockholder agreements or “other writings signed by the stockholder against whom the provision is to be enforced.” The bill sponsors defeated a proposed amendment which would have removed its fee-shifting and forum selection provisions so these issues could be revisited later.
The bill effectively prohibits the extension of the Delaware Supreme Court’s holding in ATP Tour Inc. v. Deutscher Tennis Bund et al. (2014) to the extent that holding may have been applied to stock corporations. ATP Tour Inc. upheld a fee-shifting provision in a non-stock corporation’s bylaws, finding it “valid and enforceable” under state law. This decision is still valid in its application to private, non-stock companies. For more information regarding this decision, please see our article “2014 Year in Review: Securities Litigation.” The bill also affirms the Delaware Court of Chancery’s holding in Boilermakers Local 154 Retirement Fund v. Chevron Corporation (2013), which held that the certificate of incorporation and bylaws of a corporation may specify that claims arising under the DGCL, including for breach of fiduciary duty and claims by current or former corporate directors or officers or controlling stockholders, or persons who aid and abet such a breach, can only be brought in Delaware state court.
The validity of fee-shifting provisions remains a contentious topic. Many favor such provisions, finding them necessary to curb frivolous shareholder litigation, while others argue fee-shifting terms deprive stockholders of their important right to sue to protect their rights. S.B. 75 now moves to the Delaware House of Representatives for discussion and vote. Ballard Spahr will continue to monitor and keep you informed of these developments.
