Legislation is being proposed to ask the Delaware Legislature to limit the ability of corporations to adopt fee-shifting provisions in their charter and bylaws, but to provide additional support for adopting forum selection clauses in those same corporate documents. The proposed legislation is available at this link. A memo describing the policy analysis on which the proposal is based has also been provided by a cross section of Delaware lawyers representing the major constituencies involved, such as shareholders, directors and corporations. Also available is a FAQ with answers to the most likely questions about the proposed bill. (Slight modifications to the proposed legislation were made after this post was published, and I would expect other amendments to be made prior to its final passage.)
Most readers are aware that the Corporation Law Section of the Delaware State Bar Association annually proposes amendments to the Delaware General Corporation Law for the Delaware Legislature to pass, in order to refine the DGCL on a regular basis and to make sure it adapts to changes in the marketplace. My first hand experience is that those “routine” amendments are often passed by the Delaware Legislature “routinely”. This is so because the process works well and has a long track record of benefitting the state. If the proposals for amendments to the DGCL ever backfired on the legislators–as a political matter, not necessarily a legal matter, then the next proposed bill to amend the DGCL would not pass as easily the following year. That risk, however, has not come to pass for many decades, if ever.
The proposed legislation provides that if a charter or bylaw includes a forum selection clause for stockholder disputes, Delaware must be one forum that is selected. If another state is selected as a forum, Delaware must be included as an additional optional forum. Thus, a state other than Delaware cannot be selected as the exclusive forum. This would be a legislative reversal of the First Citizens decision recently decided in Chancery. The legislation does not directly address the validity of forum selection clauses that choose states other than Delaware, but the proposed DGCL amendment does not ban a permissive forum outside of Delaware as long as Delaware is also included as a permissive forum.
The proposed legislation about fee-shifting clauses and forum selection provisions in corporate charters or bylaws may be sui generis in some ways. Most amendments to the DGCL that are presented to the Delaware Legislature are not controversial and pass without debate. This one is different. The proposed legislation linked above is, in part, a result of the ATP case, styled as ATP Tour, Inc. v. Deutscher Tennis Bund, Del. Supr., No. 534, 2013 (May 8, 2014), highlighted here on these pages, in which the Delaware Supreme Court upheld the facial validity of fee-shifting bylaws for a non-stock corporation. Many legal commentators read that decision to apply to stock corporations as well. Not everyone agreed.
Last year, before the June 30 close of the legislature’s term, legislation was proposed to prohibit stock corporations from adopting fee-shifting bylaws. The DuPont Company and other large companies as well as the U.S. Chamber of Commerce opposed the legislation that was proposed last year to limit fee-shifting bylaws. Institutional investors and shareholder-rights groups supported the proposal. Law professors lined up on both sides of the debate. In light of the short amount of time available last year before the close of the legislative session, and the strong lobbies on both sides of the issue, the legislature deferred consideration until the 2015 legislative session.
Unlike routine amendments to the DGCL, this proposed legislation confronts powerful lobbyists on both sides of the issue. Thus, this proposal may be more akin to typical legislation in which the final version of the bill that is passed is not always similar to the first version of the bill that was introduced. The only certainty about this proposed bill, is that it will generate an enormous amount of commentary and discussion. I would not expect a final outcome until the last day of the session on June 30.
If some legislation is passed that ultimately limits the ability of a corporation to adopt fee-shifting bylaws, an interesting issue will be the impact, if any, that the legislation will have on those companies that already adopted fee-shifting provisions. Generally, there is a prohibition against ex post facto laws. Stay tuned.
SUPPLEMENT: Professor Stephen Bainbridge, one of the nation’s foremost corporate law scholars, has written three commentaries already within the one business day since this proposal surfaced, including links to his prolific scholarship on the topic of fee-shifting and forum selection provisions in corporate organic documents. Each of the following titles is hyperlinked to his corresponding post: An Open Letter to the Delaware Legislature on Fee-Shifting Bylaws; Open Letter to the Delaware Legislature on Forum Selection Bylaws; Delaware Legislative Proposals on Fee-Shifting and Forum Selection Bylaws.
SUPPLEMENT II: Professor Larry Hamermesh, Director of the Institute of Delaware Corporate and Business Law, provides scholarly and insightful analysis on the issue of the potential retroactive impact of the proposed legislation on existing fee-shifting bylaws. If the proposed legislation is passed, this may be one of the first issues litigated.