The Delaware Legislature recently enacted amendments to Delaware's General Corporation Law (the "DGCL") that resolve spirited debates between the bench and bar over the enforceability of fee-shifting bylaws and forum selection bylaws. The legislation, which took effect August 1, 2015, prohibits companies incorporated in Delaware from adopting "loser pays" fee-shifting bylaws applicable to "internal corporate claims" but permits bylaws selecting Delaware (but not another state) as the exclusive forum for litigation of such claims.(i)
New Provisions Ban Fee-Shifting Bylaws For "Internal Corporate Claims"
Debate over fee-shifting bylaws was ignited in May 2014, when the Delaware Supreme Court upheld the facial validity of a fee-shifting bylaw applicable to intra-corporate litigation involving a non-stock Delaware corporation in ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A.3d 554 (Del. 2014). Companies and litigation reform advocates swiftly recognized the potential of such provisions to deter abusive and burdensome shareholder litigation (since an unsuccessful plaintiff, or plaintiff's counsel, would be required to pay defendants' legal fees), and several Delaware stock corporations adopted bylaws requiring shareholders (or their counsel) to reimburse the company and other defendants' attorneys' fees and other defense costs of the company and other defendants in unsuccessful lawsuits. Shareholder advocates, on the other hand, opposed such fee-shifting provisions, arguing that they discourage the filing of meritorious claims.
The recently effective amendments to the DGCL bar Delaware stock corporations from including provisions in their certificates of incorporation or bylaws providing for fee-shifting in litigation involving "internal corporate claims," defined as "claims, including claims in the right of the corporation, (1) that are based upon a violation of a duty by current or former director or officer or stockholder in such capacity, or (2) as to which [the DGCL] confers jurisdiction upon the Court of Chancery."(ii) Specifically, the new legislation provides that neither the certificate of incorporation nor the bylaws of a Delaware stock corporation may "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."(iii)
New Provisions Permit Bylaws Designating Delaware As The Exclusive Forum For "Internal Corporate Claims"
Corporate bylaws and charter provisions selecting an exclusive forum for stockholder claims alleging breaches of fiduciary duties or otherwise implicating the "internal affairs" of corporations have been another topic of recent controversy. Such forum selection provisions have been viewed by proponents as a means of managing the risks and expense of multi-forum litigation and ensuring that the litigation is brought in a forum with expertise in applying governing law and which will be convenient for the corporation.
Prior to the recent amendment, Delaware courts treated forum selection provisions as facially valid and assessed their enforceability on a case-by-case basis under a reasonableness standard. See, e.g., Boilermakers Local 154 Ret. Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013). The new DGCL provisions expressly authorize the adoption of provisions selecting Delaware as the exclusive forum for litigation of internal corporate claims, but preclude corporations incorporated under Delaware law from adopting provisions selecting a state other than Delaware as the exclusive forum for such claims:
"[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."
8 Del. C. § 115.
The new Delaware legislation resolves key debates regarding fee-shifting and forum selection bylaws and charter provisions, at least for internal corporate claims involving Delaware stock corporations, but battles over similar litigation reform efforts are expected to persist, particularly regarding non-Delaware corporations. States other than Delaware are increasingly courting companies to incorporate under their laws as an alternative to Delaware, and legislation addressing fee-shifting, forum selection, and other shareholder litigation reform topics may be a part of that effort. Oklahoma recently passed legislation requiring fee-shifting in shareholder derivative litigation.(iv) In addition, several states other than Delaware are considering legislation to address forum selection bylaws. In early 2015, the Virginia House of Delegates passed a bill—HB 1878—that would allow Virginia corporations to adopt bylaws designating Virginia or the jurisdiction in which the principal corporate office is located as the forum for certain shareholder litigation. So there may yet be further chapters to these debates, particularly for non-Delaware companies. Another brewing controversy that will have to be resolved in Delaware and other jurisdiction relates to minimum-stake-to-sue bylaws designed to ensure that only stockholders owning a specified minimum percentage of a company's stock may bring claims on behalf of the company. These and other shareholder litigation reform battles will continue to be fought in the courts and legislatures.