Proposed Addition to Delaware Corporate Statute Regarding Fee Provisions in Bylaws

A proposed new addition as well as related amendments to the Delaware General Corporation Law would limit the impact of a recent Delaware Supreme Court decision in ATP Tours, Inc. v. Deutscher Tennis Bund, (No. 534, 2013, May 8, 2014), highlighted on these pages, regarding the ability of a corporation to provide in its bylaws for a stockholder to pay the legal fees of a suit against the corporation or its directors when the stockholder loses that suit. The intent of the new statute would be to restrict the ability of a corporation to include such a provision in its bylaws.

The public policy reasoning behind the proposed statute is that such a provision would chill the willingness of a stockholder to file claims in order to enforce the fiduciary duties of directors, especially a stockholder who might have only a modest holding of stock. Though I’m sure there are those who might see such a provision as a cure for what some regard as an excess number of stockholder suits, “throwing the baby out with the bathwater” would discourage inappropriately the function of meritorious stockholder suits as the only means to hold fiduciaries accountable for not fulfilling their fiduciary duties.

The proposed legislation originally was to be presented to the Delaware General Assembly for passage prior to the end of the current legislative session on June 30, with a proposed effective date of August 1, 2014, but it was tabled until the 2015 legislative session due in large part to opposition from major publicly held companies.