On May 12 and June 11, 2015, the Delaware Senate and House of Representatives, respectively, passed a bill (the “Bill”)[1] that would amend Title 8 of the Delaware General Corporation Law (“DGCL”) to prohibit Delaware stock corporations from including in their charters or bylaws so-called “loser-pays” fee-shifting provisions in connection with “internal corporate claims” brought by stockholders. Following the Delaware Supreme Court’s May 2014 decision in ATP Tour, Inc. v. Deutscher Tennis Bund, in which the Court held that “fee-shifting provisions in a non-stock corporation’s bylaws can be valid and enforceable,”[2] it was unclear to some practitioners whether fee-shifting provisions in the charter or bylaws of Delaware stock corporations would be enforceable. The Bill would resolve that uncertainty by prohibiting stock corporations from adopting such provisions with respect to “internal corporate claims,” such as the claims typically brought by shareholders in Delaware in M&A and corporate governance litigation.
A second important aspect of the Bill is its codification of Delaware case law allowing a Delaware stock corporation to adopt forum-selection bylaws requiring that internal corporate claims be brought either exclusively in the Delaware courts or in courts of one or more states, so long as the Delaware courts are included as an available forum.[3] The Bill would prohibit, however, forum-selection provisions that select an out-of-state forum as the exclusive jurisdiction.
The Bill, which will become law upon being signed by the governor, provides that the changes will be effective on August 1, 2015.
BACKGROUND
In ATP Tour, the Delaware Supreme Court upheld the facial validity of a Delaware nonstock corporation’s bylaws providing for the shifting of litigation costs to the plaintiffs in litigation if the plaintiffs did not ultimately obtain a judgment on the merits that substantially achieved the full remedy sought.[4] The Court accepted this deviation from the “American Rule,” which generally requires each litigating party to pay its own litigation costs, on the grounds that parties are permitted to contractually modify this default rule.[5]
It was unsettled after ATP Tour whether fee-shifting provisions included in the charter or bylaws of a Delaware stock corporation would be enforceable. Widespread concern among the plaintiffs’ bar in Delaware led to a swift initial push for the enactment of a statutory prohibition on the adoption of loser-pays fee-shifting provisions by stock corporations. Opponents of fee-shifting argued that such provisions would infringe shareholders’ rights and would chill the filing of litigation asserting meritorious claims. Chancellor Bouchard also has noted the potential for fee-shifting bylaws to immunize corporate decisions from judicial review, because “no rational stockholder . . . would risk having to pay the Defendants’ uncapped attorneys’ fees to vindicate the rights of . . . minority stockholders.”[6] Proponents of fee-shifting argued, by contrast, that it is a necessary response to a litigation environment in which over 90% of M&A deals valued at $100 million or more involving public target companies are the subject of shareholder M&A litigation.[7]
The Corporate Law Council of the Delaware Bar, which proposed the amendments that ultimately resulted in the Bill, also proposed certain amendments to Section 262 of Title 8 of the DGCL concerning appraisal rights. That proposal stemmed from widespread concerns regarding “appraisal arbitrage” ‒ i.e., the practice of purchasing stock with appraisal rights after the public announcement of a planned merger in order to bring a proceeding for an appraisal by the Chancery Court of the “fair value” of the stock. The amendments proposed by the Corporate Law Council (a) would limit otherwise qualified appraisal claims if the claim is below a certain threshold, and (b) toll the accrual of statutory interest on any portion of consideration paid to the shareholder during the pendency of the Section 262 appraisal proceeding. Unlike in connection with fee-shifting and forum-selection, the Delaware legislature has not yet proposed any legislation adopting these amendments, which may be due to industry concern that the proposed amendments do not go far enough to curtail appraisal arbitrage by, for instance, denying appraisal rights for shares purchased after the announcement of the merger or at least the record date.
KEY PROVISIONS OF THE BILL
The Bill would prohibit the inclusion of fee-shifting provisions not only in the bylaws of Delaware stock corporations, which are usually adopted by the corporation’s directors, but also in corporate charters, meaning that even stockholders would not be able to vote to adopt such provisions.[8] Specifically, Section Two of the Bill would add a new subsection to Section 102 of Title 8 of the DGCL that would provide: “The certificate of incorporation 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.” Section Three of the Bill would amend Section 109(b) of Title 8 of the DGCL to extend this prohibition to the bylaws as well.
The Bill defines “internal corporate claims” broadly 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.” As a result, both direct claims (including claims on behalf of a putative class) and derivative claims are covered by the definition of “internal corporate claims.” The provision, while it would not eradicate fee-shifting for all types of shareholder claims, does so effectively for all shareholder litigation related to corporate governance and M&A, by far the most significant litigation that Delaware handles.
The synopsis published with the Bill clarifies that the fee-shifting prohibition is not intended to disturb the holding of ATP Tour “in relation to nonstock corporations.” Thus, the door remains open for Delaware nonstock corporations to adopt fee-shifting bylaws covering all types of claims, including internal corporate claims.
Section Five of the Bill would add a new section (Section 115) to Title 8 of the DGCL concerning forum-selection provisions in a Delaware stock corporation’s charter or bylaws. The new section would provide that “[t]he certificate of incorporation or the bylaws may 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, and no provision of the certificate of incorporation or the bylaws may prohibit bringing such claims in the courts of this State.” This provision would codify the Delaware Supreme Court’s 2013 holding in Boilermakers Local 154 Retirement Fund v. Chevron Corp., a groundbreaking decision on the use of forum-selection bylaws as a tool against the burgeoning practice of the stockholder plaintiffs’ bar to file litigation challenging M&A deals in multiple jurisdictions.[9] This provision would also implicitly overrule the Delaware Chancery Court’s 2014 decision in City of Providence v. First Citizens BancShares, Inc., which held that a forum-selection bylaw adopted by a Delaware corporation that designated the North Carolina courts as the exclusive forum was facially valid.[10]
IMPLICATIONS
- Following the Boilermakers decision, exclusive forum provisions have become increasingly common, with hundreds of public companies (including many S&P 500 companies) amending their bylaws to adopt these provisions, Companies that have done so have generally faced little, if any, negative feedback from shareholders or proxy advisory firms, and courts in other states have broadly agreed to enforce these provisions when invoked.[11] This legislative action is supportive of that trend.
- Given the importance of traditional “Delaware-style” litigation involving public corporations to the Delaware Bar and the potential for loser-pays fee-shifting provisions to significantly reduce the volume of such litigation, the Bill is not a surprising response to ATP Tour.
- The prohibition on fee-shifting charter provisions and bylaws would likely apply to “Delaware-style” breach of fiduciary duty, waste and aiding-and-abetting claims asserted (whether directly or derivatively) against the corporation, its current and former directors and officers, and relevant third parties, such as the corporation’s financial advisor or the buyer in an M&A transaction. Thus, most, if not all, class action and derivative litigation under Delaware law likely is covered by the fee-shifting ban.
- The legislation does not, however, bar fee-shifting altogether, and the scope of its application to other claims is less clear. Certain other types of claims, such as federal securities claims, may not fall within the definition of “internal corporate claims,” although one could argue that most, if not all, such suits involve a mistatement or omission in violation of some “duty.” Thus, the legislation leaves open the argument – at least theoretically – that fee-shifting for at least some federal securities claims is permissible. Any corporation advancing that argument, however, will face the contention that the federal securities laws do not permit fee-shifting charter provisions or bylaws, and will likely also have to explain its position to the major proxy advisors, which have publicly disdained fee-shifting bylaws.[12]
- More than 30 public Delaware stock corporations adopted fee-shifting provisions in the immediate aftermath of ATP Tour.[13] However, the retroactivity of the fee-shifting ban is left unaddressed by the text of the Bill, which potentially will lead to uncertainty and litigation as to the applicability of such provisions to litigation filed after the corporation’s adoption of the bylaw but before the Bill’s passage.
- Although the Bill would allow Delaware stock corporations to insist in their charters and bylaws that they be sued on internal corporate claims either exclusively in Delaware or in Delaware and the courts of another state, the Bill would bar those corporations from prohibiting the filing of such litigation in the Delaware courts altogether. The Bill would therefore invalidate charter or bylaw provisions requiring internal corporate claims to be brought only in courts outside of Delaware, and the legislation also presumably would likely invalidate a charter provision or bylaw providing that such claims must be arbitrated.
ENDNOTES
[1] S.B. 75, 148th Gen. Assem., Reg. Sess. (Del. 2015).
[2] ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A.3d 554, 555 (Del. 2014).
[3] S.B. 75 § 5.
[4] 91 A.3d at 556. A nonstock corporation is a corporation organized under Title 8 of the DGCL, but that is not authorized to issue capital stock. 8 Del. C. § 114(d)(4). Instead of having stockholders, nonstock corporations have members whose interests in the corporation are determined contractually. Id. § 114.
[5] 91 A.3d at 558.
[6] Strougo v. Hollander, 111 A.3d 590, 595 (Del. Ch. 2015).
[7] See Cornerstone Research, Shareholder Litigation Involving Acquisitions of Public Companies: Review of 2014 M&A Litigation 1 (2015), available at https://www.cornerstone.com/Shareholder-Litigation-Involving-Acquisitions-2014-Review.
[8] The synopsis published with the Bill clarifies, however, that fee-shifting provisions may be permissible if adopted pursuant to “a stockholders agreement or other writing signed by the stockholder against whom the provision is to be enforced.” S.B. 75, Synopsis.
[9] See 73 A.3d 934, 937, 950–54 (Del. 2013) (upholding bylaw providing that the Delaware courts would be the exclusive forum for litigation relating to the corporation’s internal affairs).
[10] 99 A.3d 229, 234–236 (Del. Ch. 2014).
[11] For a discussion of the provisions included by companies that adopted exclusive forum provisions, and other related considerations, see our firm’s publication, dated May 28, 2014, entitled “Exclusive Forum Bylaws Gain Momentum: California Superior Court Enforces Delaware Exclusive Forum Bylaw, Consistent With Decisions in Several Other States; Little Negative Shareholder Reaction Seen in 2014 Proxy Season for Companies That Unilaterally Adopted Exclusive Forum Bylaws”.
[12] See Glass, Lewis & Co., Proxy Paper Guidelines: 2015 Proxy Season 39 (2015), available at http://www.glasslewis.com/assets/uploads/2013/12/2015_GUIDELINES_United_States.pdf; Institutional Shareholder Services, United States Concise Proxy Voting Guidelines 7–8 (2015), available at http://www.issgovernance.com/file/policy/usconcisevotingguidelines2015.pdf.
[13] See Delaware Corporate Law Council, Explanation of Council Legislative Proposal (Mar. 6, 2015), at 3, available at http://www.corporatedefensedisputes.com/files/2015/03/COUNCIL-SECOND-PROPOSAL-EXPLANATORY-PAPER-3-6-15-U0124513.pdf; Claudia H. Allen, Fee-Shifting Bylaws: Where Are We Now?, Bloomberg Corporate Law & Accountability Report (Jan. 16, 2015), at 3.
The preceding post comes to us from Sullivan & Cromwell LLP. The post is based on their recent memo, which was published on June 12, 2015 and is available here.