As anticipated in the February 2015 edition of this newsletter, the Corporation Law Council, a Section of the Delaware State Bar Association (the “Council”), has proposed amendments to the Delaware General Corporations Law (the “DGCL”). Most notably, the amendments address fee-shifting and forum selection bylaws, as well as appraisal rights for public company shareholders. If passed into law, these amendments would offer certain opportunities for Delaware corporations seeking to limit their exposure to shareholder litigation.
Perhaps the most contentious of the proposed changes, one amendment would prohibit corporations from shifting attorneys’ fees or other litigation expenses onto a losing shareholder in an intracorporate claim. Delaware stock corporations would be barred from making such changes in either their certificates of incorporation or bylaws.
The proposed amendment is designed to limit the reach of the Delaware Supreme Court’s decision in ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A.3d 554, 555 (Del. 2014). Although that case explicitly held only that that fee-shifting provisions were permissible for non-stock corporations, it left significant uncertainty about the applicability of the holding to stock corporations. Amidst that uncertainty, at least 30 Delaware stock corporations adopted fee-shifting provisions, which, if the proposed amendment is adopted, may need to be revised.
In its explanation of the amendments, the Council cited concerns that fee-shifting provisions would suppress even meritorious litigation and, in turn, effectively eliminate the primary enforcement mechanism of the Delaware laws regulating director conduct. The Council noted that even if the amendment is adopted, corporations concerned with frivolous litigation may pursue other avenues to address their concern. For example, the amendment would not prohibit fee-shifting provisions in agreements signed by specific shareholders, and corporations may continue to formulate new litigation- regulating bylaws that would not result in fee-shifting.
Another of the Council’s proposed amendments would allow corporations to adopt bylaws that designate Delaware as the exclusive jurisdiction for intracorporate suits. Notably, the amendment would prohibit corporations from designating another jurisdiction as the exclusive forum for litigation or arbitration if it would preclude the possibility of litigation in Delaware.
The proposed amendments seek to address concern that some large shareholders are misusing statutory appraisal rights. Currently, the DGCL allows shareholders to collect interest at a statute-fixed (and currently above-market) rate on the amount for which their shares are ultimately appraised, whether or not the appraisal price is higher than the merger price. Critics have argued that this has led to unnecessary suits by shareholders seeking to take advantage of the high interest rate. The amendment would allow corporations to minimize this economic incentive by paying an amount of their choice to the shareholder after the suit is filed. If the appraisal award is ultimately higher than the amount paid, the corporation would be responsible only for interest (accrued at the statutory rate) on the difference. In addition to this change, the proposed amendments would limit appraisal rights, except in short form mergers, to instances in which the shareholder seeks appraisal of shares either (1) totaling at least 1% of the outstanding shares of that class or (2) valued at over $1 million, as measured by the merger price. If passed, the amendments will go into effect on August 1, 2015.