The 27th Annual Tulane Corporate Law Institute was held on March 19 and 20 in New Orleans. As in prior years, panelists included preeminent M&A, financing and securities practitioners and members of the Delaware judiciary, as well as prominent investment bankers, proxy solicitors, public relations advisors and journalists. In this series, we are highlighting three issues among the many topics discussed during the conference. On Wednesday, we discussed appraisal arbitrage. Monday’s topic was forum selection bylaws. Today’s topic: fee-shifting bylaws and recently proposed amendments to DGCL §§ 102(f) and 109(b).
The volume of stockholder litigation involving public companies has increased to the point that many consider such litigation to be inevitable even if often meritless. Some have interpreted the Delaware Supreme Court’s decision in ATP Tour, Inc. v. Deutscher Tennis Bund, C.A. No. 07-178-GMS (Del. May 8, 2014) to provide an opportunity for corporations to reduce the burdens of such litigation: so-called “fee-shifting” bylaws that allow a corporation to recover its litigation costs from a stockholder that is unsuccessful (or not fully successful) in a lawsuit against the corporation.
In ATP Tour, the Supreme Court held as permissible (subject to equitable review) a bylaw that allowed a Delaware nonstock corporation to recover from its members certain fees and expenses incurred in a lawsuit brought by those members against the corporation, in the event the plaintiff members did not substantially achieve “the full remedy sought”. Although the decision was limited to nonstock corporations, fee-shifting bylaw or charter provisions were adopted by thirty Delaware entities in the second half of 2014.
On March 6, 2015, the Council of the Corporation Law Section of the Delaware State Bar Association proposed amendments to DGCL §§ 102(f) and 109(b), which amendments would effectively prohibit fee-shifting bylaw and charter provisions. In support of its proposal, the Council noted the importance of the protections that litigation provides to stockholders, and the chilling effect that fee-shifting provisions have on meritorious litigation. The Council also noted that fee-shifting provisions curtail the development of the common law of corporations, which fills the legal gaps between the DGCL and the activities of Delaware corporations.
Some panelists at the Tulane Corporate Law Institute and other commentators have noted countervailing considerations, including that the amendments:
- would eliminate the possibility of a compromise position pursuant to which litigation expenses would be shared proportionately between the corporation and a stockholder plaintiff that is not fully successful;
- fail to acknowledge that Delaware courts are capable, in the absence of these amendments, of regulating fee-shifting provisions in a manner that is context-specific; and
- ignore the possibility that fee-shifting provisions may be beneficial to stockholders in the aggregate even if they discourage certain meritorious litigation.