Prohibition on Fee-Shifting Provisions

The legislation signed into law last week responds to the Delaware Supreme Court’s decision in ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A.3d 554 (Del. 2014) in which the Court upheld as facially valid a nonstock corporation bylaw imposing liability for the corporation’s legal fees on members who unsuccessfully advanced claims in litigation. The ATP decision raised a number of serious issues with respect to stockholder litigation. The decision suggested that a corporation, through its charter or bylaws, could expose stockholders to a wide variety of liabilities, including substantially greater liability than the cost of their investments. The new legislation limits the ATP Court’s ruling to nonstock corporations.

The new legislation amends certain provisions of the Delaware General Corporation Law to clarify the limits of the ATP decision. The new legislation provides that a certificate of incorporation may not contain any provision imposing liability upon a stockholder for the attorneys’ fees or expenses of the corporation or any other party in connection with an “internal corporate claim,” as defined in new Section 115. The new legislation also restricts fee-shifting provisions from being set forth in the corporation’s bylaws.

The new legislation is not intended, however, to prevent the application of such provisions pursuant to a stockholder’s agreement or other writing signed by the stockholder against whom the provision is to be enforced.

Forum-Selection Provisions

Another important amendment to the DGCL is the addition of new Section 115, which confirms, as held in Boilermakers Local 154 Retirement Fund v. Chevron Corporation, 73 A.3d 934 (Del. Ch. 2013), that the certificate of incorporation and bylaws of the corporation may effectively specify, consistent with applicable jurisdictional requirements, that claims arising under the DGCL, including claims of breach of fiduciary duty by current or former directors or officers or controlling stockholders of the corporation, or persons who aid and abet such a breach, must be brought only in the courts (including the federal court) in the state of Delaware. (Please click here to read our alert “Valid and Enforceable: Delaware Corporation Bylaws with Forum Selection Clauses” on the Boilermakers case.)

Section 115 does not address the validity of a provision of the certificate of incorporation or bylaws that selects a forum other than the Delaware courts as an additional forum in which internal corporate claims may be brought, but it does invalidate such a provision selecting the courts in a different state, or an arbitral forum, if it would preclude litigating such claims in the Delaware courts.

Section 115 is not intended to shield the manner in which a forum-selection provision has been adopted from equitable review, nor is it intended to foreclose judicial review of whether the terms of any such provision operate reasonably under particular factual circumstances. Moreover, it is not intended to authorize a provision that would purport to foreclose suit in a federal court based on federal jurisdiction, nor is it intended to limit or expand the jurisdiction of the Delaware Court of Chancery or the Delaware Superior Court.