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Delaware Bans Corporate Fee-Shifting Bylaws and Authorizes Delaware-Only Forum Requirement for Intra-Corporate Litigation

Delaware recently enacted new legislation to prohibit stock corporations from adopting fee-shifting bylaws and charter provisions, among other amendments to the Delaware General Corporation Law.  The fee-shifting ban ends a long-running controversy over whether Delaware corporations should be permitted to adopt rules enabling them, and their officers and directors, to recover their attorneys’ fees from shareholder plaintiffs who pursued unsuccessful lawsuits for breaches of fiduciary duty or related claims.  The new legislation also authorizes Delaware corporations to adopt Delaware-only forum selection provisions for litigation involving companies’ internal affairs, and modifies the procedures for statutes concerning ratification of defective corporate acts and issuance of new corporate stock, among other changes.  The new law was signed by Governor Jack Markell on June 24, 2015 and will take effect on August 1st.  A synopsis of its provisions and its legislative history can be found here.

The new fee-shifting prohibition amends Sections 102 and 109 of the Delaware General Corporation Law (DGCL) to provide that the certificate of incorporation and the bylaws of a Delaware corporation “may not contain any provision that would impose liability on a stockholder for the attorneys' fees or expenses of the corporation or any other party in connection with an internal corporate claim.”  Internal corporate claims are defined in a new Section 115 as ”claims, including claims in the right of the corporation, (i) that are based upon a violation of a duty by a current or former director or officer or stockholder in such capacity, or (ii) as to which this title confers jurisdiction upon the Court of Chancery.”

These amendments close a door that was previously opened by the Delaware Supreme Court in ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A.3d 554, 555 (Del. 2014), which held that “fee-shifting provisions in a non-stock corporation’s bylaws can be valid and enforceable under Delaware law.”  Although the ATP decision specifically addressed non-stock corporations, the court’s reasoning upholding the fee-shifting bylaw in that case appeared to be equally applicable to stock corporations, and many Delaware stock corporations began adopting fee-shifting provisions in the wake of the ATP decision.  However, as we discussed in a post earlier this year, members of the Corporation Law Council of the Delaware State Bar Association expressed concern that these fee-shifting provisions would deter stockholders from  enforcing their rights in the courts, since “few stockholders will rationally be able to accept the risk of exposure to millions of dollars in attorneys’ fees to attempt to rectify a perceived corporate wrong, no matter how egregious. “  Consequently, the Delaware bar pressed for the new law, which effectively limits the scope of the ATP decision to non-stock corporations.  As stated in the synopsis, the amendments to Sections 102 and 109 “invalidate” any provision in the certificate of incorporation or bylaws of a stock corporation that purports to impose liability upon a stockholder for the attorneys’ fees or expenses of the corporation or any other party in connection with an internal corporate claim.

The new legislation also authorizes Delaware corporations to adopt rules in their certificates of incorporation or bylaws that “require, consistent with applicable jurisdictional requirements, that any or all internal corporate claims shall be brought solely and exclusively in any or all of the courts in this State,” while simultaneously mandating that “no provision of the certificate of incorporation or the bylaws may prohibit bringing such claims in the courts of this State.”  These provisions are contained in the new Section 115 of the DGCL.  The first provision codifies the Delaware Court of Chancery’s holding in Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013), allowing Delaware corporations to designate courts in Delaware (including both the state courts and the federal courts) as the exclusive forums for litigation involving their internal affairs.  The second provision bars any bylaw or charter rule that would prevent shareholders from bringing corporate claims in the Delaware state courts.  This portion of the law effectively overrules another Delaware Court of Chancery decision, City of Providence v. First Citizens BancShares, Inc., 99 A.3d 229 (Del. Ch. 2014), which had upheld a corporate bylaw designating another jurisdiction as the exclusive forum for litigation involving the company’s internal affairs.

Finally, the new law makes a number of other changes in the DGCL.  These include: amending Section 152 to give corporations more flexibility in authorizing stock issuances by allowing the board to delegate certain decisions to corporate designees; and amending Section 204 to clarify procedures for ratification of defective corporate acts under that Section.

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Chip Phinney