There has been considerable interest over the last year about whether a fee-shifting provision in the charter or bylaws of a Delaware corporation is enforceable. On Thursday, June 11, 2015, the Delaware House of Representatives settled this debate, passing Senate Bill (S.B.) 75 – a bill that would prohibit such a provision.^[1] In addition, S.B. 75 approved the validity of a forum-selection clause which would designate Delaware as the exclusive forum to adjudicate internal corporate claims. The bill was previously approved in May 2015 by the Senate and now goes to Governor Jack Markell to sign. If approved, the fee-shifting and forum-selection changes are expected to take effect August 1, 2015.

Fee-Shifting Barred

Generally, under the so-called “American rule,” parties to a litigation must pay their own attorneys’ fees and costs. Conversely, a fee-shifting bylaw would force shareholder-plaintiffs to pay the attorneys’ fees or expenses of the corporation (or any other party in connection to the suit) for internal corporate claims, if the plaintiff-stockholder does not prevail. Internal corporate claims include, for example, a breach of a fiduciary duties by current or former directors or officers.

Fee-shifting gained traction among Delaware corporations last year when the Delaware Supreme Court in ATP Tour, Inc. v. Deutscher Tennis Bund upheld a non-stock corporation’s fee-shifting provision, holding that such bylaws “can be valid and enforceable under Delaware law.”^[2] While the decision in ATP Tour Inc. stipulated that determining whether a particular bylaw was enforceable would still turn “on the circumstances surrounding its adoption and use,”^[3] some Delaware corporations raced to adopt such fee-shifting provisions as a mechanism to dissuade often burdensome and expensive shareholder suits.

However, the ATP Tour, Inc. decision was scrutinized by shareholder advocates because such fee-shifting bylaws could dissuade even meritorious suits. Similarly, the Corporation Law Council, a committee of the Delaware State Bar Association, in recommending that the Delaware General Corporation Law bar fee-shifting, elaborated that “[p]ermitting fee shifting as a limitation on stockholder litigation would be functionally equivalent to permitting corporate charter or bylaw provisions limiting or eliminating fiduciary duties of officers and directors. If investors were to perceive over time that statutory rights and fiduciary obligation had become hollow concepts, investors’ confidence could diminish, and capital formation could be adversely affected.”^[4]

Consequently, S.B. 75 codifies the stance of the Corporation Law Council and bars such provisions.

Forum-Selection Clause Approved

S.B. 75 also makes explicit that a Delaware corporation can adopt a provision in its charter or bylaw that allows for Delaware to be the sole, exclusive forum for internal corporate disputes. The bill also provides that “no provision of the certificate of incorporation or the bylaws may prohibit bringing such claims in the courts of this State.”

Practice Tips

The new S.B. 75 legislation is instructive for Delaware corporations. While a Delaware company’s board cannot adopt a fee-shifting provision, it can mandate that internal disputes are adjudicated in Delaware. Such forum certainty is advantageous because it fosters predictability for businesses and protects litigants from plaintiff-favorable forum-shopping.

For more information on this advisory, please contact:

Carol W. Sherman
(212) 808-5038
csherman@kelleydrye.com

^[1] S.B. 75, Del. 148^th Gen. Assembly (2015).

^[2] ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A.3d 554, 555 (Del. 2014).

^[3] ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A.3d 554, 559 (Del. 2014).

^[4] Corporation Law Council, Explanation of Council Legislative Proposal.