The fate of “loser plays” fee-shifting bylaw/charter provisions has yet to be finally determined. As previously mentioned in a blog here, fee-shifting language has, however, shown up in a number of ways, both with respect to Delaware and non-Delaware entities, although caution has been urged when considering the adoption of such a provision. After the Delaware Legislature punted the issue to its 2015 session, all eyes have been on Delaware to see what action is recommended and eventually taken there.
As expected, both sides of the argument have weighed heavily into the Delaware battle. Large pension funds as well as the Council of Institutional Investors, among others, have urged the Delaware Legislature to restrict the use of fee-shifting provisions while others, including the U.S. Chamber of Commerce and several large corporations, have advocated in favor of such provisions.
In a much anticipated move, earlier this month the Corporation Law Council of the Delaware State Bar (the “Council”) revealed that it is recommending a statutory amendment to prohibit fee-shifting provisions in bylaws and charters. See this link for the proposed legislation. The Council’s decision has been applauded by many, including the plaintiffs’ bar as well as most academics, while it has been severely criticized by proponents of fee-shifting. Given the recommendation by the Council, it seems likely the Delaware Legislature will adopt a statutory amendment prohibiting use of fee-shifting provisions, but, given the on-going debate, the final outcome is certainly not a slam dunk.
Even if the Delaware Legislature follows the Council’s recommendation, there has been some discussion as to the language of the proposed amendment. See link here to “Delaware Throws a Curveball” by Professor John C. Coffee, Jr., March 16, 2015. Professor Coffee points out that the Council’s language precludes fee-shifting only “in connection with an intracorporate claim,” and that this may leave open use of fee-shifting provisions in some contexts (e.g., federal securities class actions not alleging a breach of a director/officer duty). While acknowledging that the drafting may just be flawed, Professor Coffee goes on to discuss reasons (some fairly compelling) as to why the Council may have intentionally made narrow the proposed statutory amendment. I encourage those who are interested to read Professor Coffee’s full discussion in the link provided above.
There has also been discussion, including by Professor Coffee in the article referenced above, as to whether Federal preemption will play a role. Suffice it to say, for purposes of this blog, that Federal preemption may eventually become an issue, one that is complicated and merits attention.
In summary, the Council has made its position clear and the Delaware Legislature, despite heavy lobbying against it, is likely to follow suit. Whether the narrowness of the statutory amendment language was inadvertent or intentional awaits to be seen, as does the possible issue of Federal preemption. In addition, it should be noted that resolution of the issue in Delaware certainly doesn’t dictate how other states (Texas, for example) may address the issue. As a practical matter, however, shareholder-rights groups (e.g., Institutional Shareholder Services, Inc.) have significant influence and may effectively prevent the use of fee-shifting provisions at most public companies. More to come when the Delaware Legislature finally takes up the issue.