The Delaware state senator responsible for introducing a proposed ban on fee-shifting bylaws has instead sponsored a resolution – unanimously passed in the Delaware state senate – to delay any vote on the proposed ban until 2015.
The delay, introduced on June 18, came amid intense lobbying against the proposed legislative ban by the U.S. Chamber of Commerce and reportedly at least one large Delaware-headquartered corporation. The proposed ban also enjoyed support from the governor of Delaware, and perhaps not coincidentally, a key Delaware shareholders’ trial lawyer and reported fundraiser for the governor.
What now? A principle reason that companies incorporate in Delaware is the certainty underlying Delaware corporate jurisprudence. While a fight over the ban has been put off for at least six months, public company boards of directors are left with a quandary. The Delaware Supreme Court’s decision in ATP Tours Inc v Deutscher Tennis Bund opened the door for fee shifting bylaws as being ”facially valid,” at least for non-stock corporations – and thus presumably regular stock-issuing corporations as well – subject to adoption by a board after due deliberation for a “valid corporate purpose.”
The decision, and the looming cloud of legislative uncertainty, kick up the following questions:
The ATP case was for a non-stock corporation: What assurance is there that Delaware courts will expand the case to stock-issuing corporations?
None. There is no assurance, though it would seem quite a reversal of logic to deny the same reasoning behind ATP to stock-issuing corporations.
What do terms like “facially valid” and a “valid corporate purpose” mean?
Because the case law on fee shifting bylaws is limited, one has to borrow from other generally accepted Delaware reasoning. One would assume that any company adopting bylaws should have the directors receive a fulsome briefing on their potential benefits and detriments, and the reasoning underpinning each. In addition, the adoption likely should not be in response to a specific immediate threat of litigation, but rather as a general policy matter for the corporation.
Have ISS and Glass Lewis weighed in on this issue?
No, neither major proxy advisory firm has formally issued policy guidance on this topic. However, given their positions on similarly themed issues, it is likely that both will at least ding board governance scores, if not recommend withholding director votes if these provisions are not put to a stockholder vote. Companies will need to contemplate whether they believe this issue of enough significance to enter the fray without clear indications from proxy advisory firms.
What happens if Delaware in 2015 does pass legislation banning fee-shifting bylaws?
Many believe that, since the objections that prompted the delay were directed at a sense of lack of due deliberation and analysis of the issues, it remains entirely possible that Delaware will still pass some form of a ban on fee-shifting bylaws in 2015. However, unless and until that reversal occurs, there would seem little downside to adopting these provisions except for potentially risking the ire of the proxy advisory services if the provisions are not put to a stockholder vote. Many financial stockholders may have no issue with such provisions. Thus, boards should discuss the pros and cons, particularly in light of the potential upside of impeding potentially frivolous litigation.