As I noted in a recent post (here), in response to a recent Delaware Supreme Court decision upholding the facial validity of fee-shifting bylaws, proposed legislation was introduced in the Delaware General Assembly to limit the Supreme Court’s ruling and to restrict the ability of Delaware corporations to utilize their bylaws to shift the costs of litigation to unsuccessful shareholder litigants.
However, as discussed in detail in a June 20, 2014 memo from the Skadden Arps law firm entitled “Fee Shifting: Bylaws: The Current State of Play” (here), the legislative proposal has now been withdrawn, in order for representatives of the Delaware bar to study the use of fee-shifting bylaws, in anticipation that the Delaware legislature will take up the issue again in 2015. Broc Romanek’s discussion on his TheCorporateCounsel.net blog of the recent action withdrawing the proposed legislation can be found here.
As I discussed in a recent post (here), in a May 8, 2014 decision in ATP Tour, Inc. v. Deutscher Tennis Bund, the Delaware Supreme Court upheld the facial validity of a nonstock corporation’s bylaw provision shifting attorneys’ fees and costs to unsuccessful plaintiffs in intra-corporate litigation. Because the court’s holding seemed to be equally applicable to stock corporations as well as to nonstock corporations, the decision appeared to open the way for all Delaware corporations to adopt fee-shifting bylaws. The possibility that companies might be able to shift litigation costs to unsuccessful shareholder claimants potentially could have transformed shareholder litigation.
On May 22, 2014, the Delaware Corporate Law Council proposed an amendment to the DCGL that according to the amendment’s synopsis is “intended to limit the applicability of [the Delaware Supreme Court decision in ATP Tours, Inc. v. Deutscher Tennis Bund] to non-stock corporations, and to make clear that such liability may not be imposed on holders of stock in stock corporations.”
As discussed in the recent Skadden law firm memo, the legislative proposal, like the Delaware Supreme Court’s decision in the ATP Tour case, “became the subject of much attention and debate from the media and legal commentators and prompted a significant amount of lobbying effort.” Legal reformers argued that the ATP Tour decision “gives corporations a means to protect their stockholders against the high costs of litigation by deterring the filing of abusive, duplicative suits.”
The Latest Legislative Development
On June 18, 2014, the legislative proposal was withdrawn and the Delaware Senate introduced a resolution addressing the issue of fee-shifting bylaws. The resolution notes that Delaware law is “balanced and flexible” and “protects legitimate interests of all stakeholders.” The resolution further notes that “maintaining balance, fairness and predictability requires attention to ensure that statues, court rules, and judicial doctrine … do not encourage meritless litigation and impose unnecessary costs.” At the same time, the resolution notes, various groups have “expressed concern about the potential unintended consequence of permitting stock corporations to adopt such bylaws and the chilling impact it could have on meritorious litigation.”
The resolution goes on to state that Delaware’s governor and legislature “strongly support a level playing field that provides the ability for stockholders and investors to seek relief” and that the proliferation of fee-shifting bylaws “will upset the careful balance that the State has strived to maintain.”
In recognition of the “complexity and importance” of these issues, the Senate resolution calls upon a number of groups to continue their “ongoing examination” of the State’s laws “with an eye toward maintaining balance, efficiency, fairness and predictability.” The examination is expressly requested to include whether the adoption of legislation relating to fee-shifting bylaws would be appropriate for the General Assembly to consider in 2015.
The groups urged to conduct this examination include the Delaware State Bar Association, its Corporation Law Section, and the Council of that Section.
For the time being, it is unclear whether or not fee-shifting bylaws will be permitted in Delaware. The Skadden law firm’s memo urges caution for companies considering the adoption of fee-shifting bylaws. As the memo notes, “there is a significant risk that adoption of fee-shifting bylaws could generate a meaningful adverse reaction from, among others, governance advocates, proxy advisory firms, and some stockholders.”
Even though the Delaware legislature will not be acting until 2015 at the earliest, there are good reasons for companies to proceed cautiously in considering the adoption of a fee-shifting bylaw. The law firm memo outlines a number of specific items for companies to consider in that regard, including, for example, the company’s stockholder profile and its relationship with its shareholder base.
While the memo urges caution on fee-shifting bylaws, the law firm continues to believe that companies should consider the adoption of forum selection bylaws. As I discussed in a recent post (here), even though questions continue to surround the possibility that companies might be able to try to control abusive shareholder litigation through the use of fee-shifting bylaws, the adoption of forum selection bylaws has become increasingly common as a possible way to try to “reduce the cost and risk of multi-jurisdictional stockholder litigation.”
More About Forum Selection Bylaws: A lawsuit filed on June 19, 2014 in the Delaware Chancery Court raises interesting questions about the extent of the ability of corporations and their boards to adopt forum-selection bylaws. According to a June 20, 2014 Law 360 article entitled “First Citizens Sued Over ‘Only in NC’ Forum Choice Bylaw” (here, subscription required), the City of Providence, Rhode Island, a shareholder of First Citizens BankShares, has filed a lawsuit challenging the validity of a bylaw recently adopted by First Citizens that designates North Carolina as the exclusive forum for a wide variety of shareholder suits, even though the company is organized under the laws of Delaware.
According to the article, the dispute arises out of the planned merger of First Citizens and South Carolina-based First Citizens South. The bylaw designating North Carolina as the exclusive forum for shareholder litigation was adopted the day before the merger was announced. In its lawsuit, the City of Providence seeks a judicial declaration that the bylaw is invalid under Delaware General Corporation Law provisions giving the Delaware Chancery Court exclusive jurisdiction for many shareholder claims against Delaware corporations. The City of Providence alleges that First Citizens’ board breached their fiduciary duties by adopting the bylaw and seeks to have the court declare the bylaw invalid and unenforceable.
As discussed here, in June 2013, the Delaware Chancery Court upheld the validity of a bylaw adopted by Chevron’s board that designated Delaware as the exclusive forum for adjudication of various shareholder disputes. This latest lawsuit against First Citizens raises the interesting question of whether or not boards of Delaware corporations appropriately may adopt bylaws designating a forum other than Delaware as the exclusive forum for shareholder disputes. The City of Providence alleges in its lawsuit challenging First Citzens’ recently adopted bylaw that the company’s bylaw improperly deprives the company’s shareholders of their rights to avail themselves of Delaware’s courts.
It will be interesting to see how broadly the Delaware courts will extend the rights of boards to adopt forum selection bylaws and in particular to see whether or not the Delaware court will conclude that the board’s authority in that regard includes the right to designate a forum other than Delaware as the exclusive forum for shareholder disputes.