The Corporation Law Section of the Delaware State Bar Association recently approved amendments to the General Corporation Law of the State of Delaware (the “Proposed DGCL Amendments”), which would prohibit Delaware stock corporations from enacting fee-shifting bylaws, but allow corporations to adopt forum selection bylaws where Delaware is the chosen dispute resolution forum. The Proposed DGCL Amendments also generally eliminate the right of stockholders of public Delaware corporations to exercise appraisal rights in mergers unless the number of shares for which an appraisal is sought or the value of the merger consideration at issue is substantial. The amendments to the appraisal statute also provide an option to the surviving corporation to pay to the stockholders seeking appraisal a sum of money, at any time before judgment is entered in the appraisal proceeding, to stop the accruing of interest on that sum. If approved by the Delaware General Assembly, the Proposed DGCL Amendments would become effective on August 1, 2015, with the amendments to the appraisal statute only applying to mergers consummated pursuant to acquisition agreements entered into on or after August 1, 2015.
In addition, legislation that would implement a new confidential arbitration procedure for the efficient and rapid resolution of corporate and commercial disputes involving Delaware business entities is making its way through the Delaware General Assembly. The proposed arbitration legislation, also known as the Delaware Rapid Arbitration Act (or “DRAA”), is expected to become effective in May 2015.
The DRAA was drafted by a group working under the leadership of Chief Justice Strine and Chancellor Bouchard with substantial participation from the Department of State and members of the Corporation Law Section of the Delaware State Bar Association. The DRAA replaces the confidential arbitration procedure adopted by the Delaware General Assembly in 2009, which was held unconstitutional by the Third Circuit in 2013. The major difference between the prior legislation and the DRAA is that sitting judges cannot act as arbitrators under the DRAA and proceedings do not take place in the courthouse. However, the parties would have substantial discretion to otherwise name the arbitrator of their choosing by written agreement. The DRAA requires resolution of arbitrated matters in no more than 120 days, subject to a single extension of up to no more than an additional 60 days, by unanimous consent of all parties to the arbitration and the arbitrator.
Fee-Shifting Bylaws
If adopted, the Proposed DGCL Amendments would prohibit certificate of incorporation and bylaw provisions that impose liability on a stockholder for the attorneys' fees or expenses of the corporation or any other party in connection with intracorporate claims. Intracorporate claims include derivative and direct actions against directors and officers for breach of fiduciary duty, as well as actions as to which the DGCL specifically confers jurisdiction upon the Delaware Court of Chancery, such as disputes over contested director elections.
Similar amendments were proposed, but not adopted by the Delaware General Assembly, in 2014. The 2014 amendments were proposed by the Corporation Law Section of the Delaware State Bar Association after the Supreme Court of the State of Delaware upheld the facial validly of bylaws which shifted the expense of litigation to certain members of a Delaware nonstock corporation in ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A.3d 554 (Del. 2014). The Proposed DGCL Amendments do not disturb that ruling in relation to nonstock corporations. Similarly, the Proposed DGCL Amendments do not prohibit stockholders and corporations from negotiating contractual, fee-shifting arrangements.
Forum Selection Bylaws
The Proposed DGCL Amendments expressly authorize certificate of incorporation and bylaw provisions that require the adjudication of intracorporate claims to be brought exclusively in any or all of the courts of the State of Delaware. However, the Proposed DGCL Amendments prohibit forum selection bylaws and charter provision that confer jurisdiction on any court other than a Delaware court. The Proposed DGCL Amendments do not prohibit stockholders agreements or other contractual agreements that bind the parties to specific forums.
Appraisal Rights
The Proposed DGCL Amendments address the increase in appraisal arbitrage activity and appraisal petitions by limiting appraisal rights and the costs of litigating appraisal proceedings. Specifically, the statutory changes would eliminate the availability of the appraisal remedy where the corporation's shares had been traded on a national securities exchange unless:
(1) the total number of shares entitled to appraisal exceeds 1% of the outstanding shares of the class or series of stock entitled to appraisal;
(2) the value of the consideration provided in the merger for such shares exceeds $1 million; or
(3) the merger was approved pursuant to Delaware’s short-form merger statutes.
Section 253 and Section 267 short-form mergers (i.e., mergers accomplished between a parent entity and a subsidiary corporation without a stockholder vote based on the parent’s 90% ownership of the subsidiary corporation) are not subject to the new appraisal limitations because an appraisal proceeding may be a complaining stockholder’s sole remedy. The Proposed DGCL Amendments also allow corporations to pay to the stockholders seeking appraisal a sum of money to stop the accruing of interest at the statutory rate of 5% over the Federal Reserve discount rate on that sum.
Delaware Rapid Arbitration Act
The DRAA provides for the confidential resolution of disputes by expert arbitrators chosen by the parties within 120 days (with the opportunity to extend the timeframe once for 60 days provided all parties and the arbitrator agree to the extension). The DRAA vests exclusive jurisdiction to determine the scope of the arbitration to the arbitrator and allows for a single direct challenge of the arbitrator’s decision to the Delaware Supreme Court, cutting out intermediary levels of review that could impede a swift resolution of the dispute.
Where challenges are taken to the Delaware Supreme Court, those proceedings are public and limited to review under the standards of the Federal Arbitration Act. Contracting parties may opt to have their disputes resolved under the DRAA if:
(1) at least one party to the agreement is a business entity formed or organized under Delaware law or having its principal place of business in Delaware;
(2) no party to the agreement is a consumer;
(3) the agreement provides that it shall be governed by or construed under Delaware law; and
(4) the agreement includes an express reference to the “Delaware Rapid Arbitration Act.”
