Delaware Bars Fee-Shifting Bylaws Provisions but Allows Delaware Forum Selection Clauses in Intracorporate Litigation

June 26, 2015

On June 24, 2015, Delaware Governor Jack Markell signed into law Senate Bill No. 75, “An Act to Amend Title 8 of the Delaware Code Relating to the General Corporation Law.” The law prohibits a Delaware stock corporation from adopting fee-shifting or “loser pays” provisions in its bylaws or certificate of incorporation that would shift attorneys’ fees and costs of defense to unsuccessful plaintiffs in intracorporate litigation. The law confirms that the certificate of incorporation or bylaws of a corporation may contain a forum selection clause specifying that intracorporate claims may be brought only in Delaware courts, but bars provisions that would prohibit stockholders from bringing such claims in Delaware courts. The changes specifically cover intracorporate litigation, such as derivative claims in the name of the corporation for a breach of fiduciary duty.

The Act was drafted in response to the Delaware Supreme Court’s May 2014 ruling in ATP Tour Inc. v. Deutscher Tennis Bund, 91 A.3d 554 (Del. 2014), which held that fee-shifting bylaws for a non-stock corporation were facially valid and enforceable under the Delaware General Corporation Law if adopted by appropriate procedures and for a proper corporate purpose.

The reasoning of the court in the ATP case seemed applicable to stock corporations as well, and the court’s ruling generated a lot of attention as a potential way for public corporations to deter baseless shareholder suits so often filed in the merger and acquisition arena. However, shareholder activists and proxy advisory firms came out against the adoption of such provisions as a drastic remedy that would deter meritorious suits and could potentially undermine investor confidence.