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Delaware_State_CapitolLegislation 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.

Forbes magazine has an article with excerpts from a presentation by Chancellor Leo Strine, Jr. of the Delaware Court of Chancery at a gathering organized by the U.S. Chamber of Commerce. His Honor is quoted regarding his views on the less meritorious suits that follow quickly on the heels of about 90% of all mergers announced in deals involving $100 million or more. Of course, Chancery decisions involving such cases are often highlighted on these pages.

Delaware Courts have been listed again as number one in the nation in a survey sponsored by the U.S. Chamber of Commerce, for the ninth time in a row.  The factors by which the states were measured included: judges’ impartiality, timeliness of decisions and judges’ competence. By comparison, the (state) court system in nearby Philadelphia made the list of the top 5 worst cities in the country, with Chicago earning the dubious distinction of the city with the worst court system in the U.S. The results of this survey of court systems throughout the country in prior years have been highlighted on these pages here.

Delaware Courts have been ranked first in the nation again, for the eighth year in a row, by a survey done by the Institute for Legal Reform, an arm of the U.S. Chamber of Commerce. The survey of the court systems in all 50 states found:

 … Delaware’s litigation environment number one in the country for fairness. The survey, Lawsuit Climate 2010: Ranking the States, released today by the U.S. Chamber Institute for Legal Reform (ILR) shows that Delaware has led the other 49 states since the survey was first conducted in 2002.

In re Countrywide Corp. S’holders Litig., 2009 WL 2595739 (Del. Ch., Aug. 24, 2009), read letter decision here.  The Chancery Court’s separate letter decision of August 28, 2009 approving legal fees relating to the settlement in this case can be read here.

Prior Decisions

The prior decision of the Chancery Court in which the court refused to approve the class action settlement in this case,  In re Countrywide Corp. S’holders Litig., 2009 WL 846019 (Del. Ch., Mar. 31, 2009), was reviewed by Kevin Brady here. Other posts on this blog involving Countrywide cases can be found here.

Background

The background facts were described in the synopsis of the March 2009 opinion by Kevin Brady at the above link. Familiarity with that opinion is presumed and a summary of the facts will not be repeated. In sum, a class action suit was filed shortly after Countrywide announced that it was merging with Bank of America in January 2008. In exchange for supplementatl disclosures prior to the vote, but no additional monetary consideration, the parties negotiated a settlement. In the March 2009 opinion, the Chancery Court refused to approve the settlement based on an objection by one shareholder that the release should not cover certain common law fraud claims that could be brought in light of a speech by the CEO of BOA, Kenneth Lewis, to the Delaware State Chamber of Commerce on January 14, 2008, in which he dismissed rumors of Countrywide’s bankruptcy and asserted that Countrywide had a "very impressive liquidity plan…." After the March 2009 opinion, the release was amended accordingly.

Now, the same shareholder objects to the release of potential federal securities laws violations based on the same statements of Lewis.

Overview of August 24, 2009  Decision

  • The Court  explained its duty to apply various factors to make an independent determination about whether the proposed settlement was fair and reasonable
  • Rule 23(a)  and  Rule 23(b) must also be satisfied before the Court will conclude that this case should be certified as a class action–which must precede the Court’s approval of the proposed class action settlement.
  • In certifying this case as a class action, the Court did not require an opt-out right for class members
  • The  Court rejected the objections to the settlement and approved the settlement  based on the following rulings and reasoning:

    • The absence of a monetary benefit "is not fatal to a settlement which, almost by definition, confers only a therapeutic benefit." The Court found the merger price fair and that there were no other potential buyers–and that the shareholders would have done worse without the merger.

    • The Court reviewed the elements that must be established for a successful fraud action based on the federal securities laws (which the objector arged should not be released), and found that those claims "possess no obvious value" (based on the unlikely success in pursuing them on the facts of this case.) Thus, the Court reasoned it was fair and reasonable to release them.

    • The federal securities laws claims based on the Lewis statements did not predominate over the equitable claims.

    • The release provision in the settlement proposal is not overbroad. In reaching this conclusion, the court evaluated not only the claims in the complaint but also those that might be barred due to the release. See Raskin v. Birmingham Steel Corp., 1990 WL 193326 at *6 (Del. Ch. Dec. 4, 1990). See also In Re Philadelphia Stock Exchange, 945 A.2d at 1145-46 (Del Ch. 2008)(a settlement can release claims not specifically asserted in a settled action only if those claims are "based on the same factual predicate or the same set of operative facts as the underlying action".)

    • There is no requirment that a specific claim be included in a lawsuit in order for it to be released. Id., 945 A.2d at 1137

    •  An objector is not required to present its common law fraud claims (that it wants carved out of the settlement) with the same specificity as would be needed when pleading in a complaint.

    • Approval of a class action settlement by the Court of Chancery only requires a cursory scrutiny of the issues presented, but the Court’s consideration must be the product of a logical and deductive process. 

 The Court thus concluded that the class treatment was proper, the case was certified as a class action and the proposed settlement was approved.

Attorneys’ Fees

In its letter decision of August 28, 2009 approving attorneys’ fees (linked above), the Court  recited the familar factors it must consider in reviewing an application for fees, as announced in the seminal Supreme Court opinion of Sugarland Indus., Inc. v. Thomas, 420 A.2d 142 (Del. 1980). There was no specific objection, other than a general complaint that the fees sought were too high. The Court addressed the following factors:

  1. Benefit Achieved. Although the benefit achieved in this case was not monetary, the supplemental disclosures benefitted the shareholders by providing them a better understanding of the transaction, and thus a fee award is warranted. The disclosures were material and beneficial to the class.
  2. Benefits Attributable to Plaintiffs’ Counsel. This factor was clearly satisfied.
  3. Contingent Fee Arrangement. The plaintiffs’ counsel took this case on a fully contingent basis.
  4. Time and Effort Spent. The Court observed that this was an expedited matter that included a preliminary injunction motion and depositions in several states as well as "extensive document review". Consultation with experts was also among the tasks done by plaintiff’s counsel.The time spent by plaintiffs’ counsel was about 4,000 hours. Though not part of the analysis, the Court noted that if an hourly rate were computed, it would not be excessive.
  5. Difficulty and Complexity of the Litigation. The Court emphasized that this was expedited litigation that "involved difficult issues" and plaintiffs’ counsel was confronted with numerous challenging issues.
  6. Standing and Ability of Counsel. The Court found that plaintiff’s counsel are "experienced and skilled in complex Delaware corporate class action litigation".

In sum, the Court found that $750,000 would be a fair and reasonable award for combined fees and expenses under the circumstances of this case. (Though the amount sought was initially in excess of $1.4 million, the parties later reached an agreement on an application for a combined award of fees and expensed in the amount of $750,000.)

In re Countrywide Corporation Shareholders Litigation, Del. Ch., C.A. No 3464-VCN (March 31, 2009), read opinion here.

Kevin Brady, a respected Delaware litigator, provides us with the benefit of his following review of this case.

In this Chancery Court decision, Vice Chancellor Noble  denied “for the time being” an application to certify a class and approve a stipulated settlement because the settlement would have improperly eliminated some investors’ claims for common law fraud.

After the January 11, 2008, announcement of Countrywide’s proposed merger with Bank of America Corporation (“BOA”), Countrywide stockholders brought an action seeking to enjoin the merger, alleging breach of fiduciary duties by the individual director-defendants of Countrywide and aiding and abetting charges against BOA. Ultimately, a settlement was negotiated whereby the class claims would be dismissed in return for additional disclosures; there was no additional monetary consideration.

Background Facts

Starting in the summer of 2007, in what has become an all-too-familiar scenario, Countrywide started experiencing financial difficulties due to, among other things, increased rates of loan defaults on residential mortgages, foreclosures due to subprime mortgages, and the need for capital and liquidity. Countrywide entered into an agreement in August 2007 with BOA to secure additional funding. BOA invested $2 billion in Countrywide and in return BOA received numerous benefits in addition to a 16% stake in Countrywide. The crisis continued to worsen. Countrywide’s stock price continued to fall and bankruptcy rumors surfaced. The situation was dire so Countrywide went back to BOA for a potential transaction and on January 11, 2008, Countrywide announced that it had entered into a merger agreement with BOA. On June 25, 2008, Countrywide’s shareholders voted to approve the merger which closed on July 1, 2008.

Class Action Allegations and Settlement

After the merger announcement, stockholder actions were filed alleging that the Countrywide Board had breached its fiduciary duties by: (i) agreeing to a merger which did not provide fair and adequate consideration; (ii) discouraging other bidders from making an offer; (iii) issuing a false and misleading preliminary proxy statement; (iv) agreeing to provisions in the merger agreement that allegedly insulated Countrywide’s directors and officers from liability for breaches of fiduciary duty raised in pending derivative actions; and (v) entering into the merger agreement without adequately valuing certain pending derivative claims. Within days of the plaintiffs moving for a preliminary injunction, the parties reached an agreement to settle the consolidated actions by providing additional disclosures which occurred on May 28, 2008 and releasing the defendants from a wide range of potential claims. A Stipulation of Settlement was filed on June 13, 2008 requesting Court approval. The parties also stipulated to the propriety of certifying a non-opt-out class pursuant to Court of Chancery Rules 23(a) and 23(b)(1) or (b)(2). Several shareholders objected emphasing the limited benefits of the proposed settlement to the shareholders and the broad release of claims. In addition, one objector challenged the appropriateness of a certification without an opportunity to opt-out.

The Federal Objectors and “Two Novel Theories”

Objections to the settlement were raised by five former Countrywide shareholders (the “Federal Objectors”) who were plaintiffs in a Federal Court action brought in California against Countrywide. The Federal Objectors lost standing in California Federal Court to pursue the derivative claims after the close of the merger because under Delaware law, “a merger which eliminates a derivative plaintiff’s ownership of shares of the corporation for whose benefit she has sued terminates her standing to pursue those derivative claims.”

To avoid the impact of Delaware law, the Federal Objectors raised what the Vice Chancellor called “two novel theories of direct liability, both of which they argue have value equal to that of the derivative claims and, thereby, render the proposed settlement fundamentally unfair.” Without any supporting case law, the Federal Objectors argued that the Countrywide directors had a fiduciary duty to: (i) value the derivative claims pending against them at the time the merger was negotiated; and (ii) preserve that value “either by extracting additional consideration from BOA or by assigning the derivative claims to a litigation trust that could pursue the claims for the benefit of Countrywide’s shareholders.” The Vice Chancellor, however, was not persuaded.

In discussing the applicable law, the Vice Chancellor noted that because this merger was a stock-for-stock transaction of two widely-held corporations, the Countrywide board’s decisions surrounding the merger were subject to the protections of the business judgment rule. Moreover, the Court noted that the presumption protects a board-approved transaction unless the plaintiff can show that a majority of the directors were self-interested, lacked independence, were grossly negligent in failing to inform themselves, or that the transaction can be attributed to no rational business purpose. The Court concluded that the Federal Objectors had failed to demonstrate “any facts suggesting their claims could overcome the insulating effects of the business judgment rule.” Therefore, the Court overruled the Federal Objectors’ objections.

The SRM Objectors

SRM Global Fund Limited Partnership (“SRM”) challenged the propriety of class certification by arguing that its common law fraud claims for money damages were individual and thus “predominate over the equitable relief found in the Delaware Complaint.” SRM also argued that “to foreclose the individual common law fraud claims of SRM by virtue of certification of a class action and approval of the Proposed Settlement would violate due process.”

For factual support, SRM pointed to January 14, 2008 when, just days after the merger was announced, Kenneth Lewis , the Chairman, Chief Executive Officer, and President of BOA, in a speech to the Delaware State Chamber of Commerce, dismissed rumors of Countrywide’s impending bankruptcy and asserted that Countrywide “had a very impressive liquidity plan [and] backup lines in place.” SRM claimed that these Lewis Statements were false and that this misrepresentation induced SRM to hold, rather than sell, its shares of Countrywide which resulted in losses of $80 million. As a result, SRM alleged that its common law fraud claims arising out of the Lewis Statements were uniquely individual, not shared by the named plaintiffs and the plaintiffs could not adequately raise them so they should not be dismissed.

Vice Chancellor Noble agreed, finding that it was “improper to include SRM’s individual claims based on the Lewis Statements within the reach of the class action and the scope of the proposed release precludes both class certification and approval of the proposed settlement.”

Almost Approved But Denied For Now – With Options

Vice Chancellor Noble found that “except for the matters raised in the SRM Objections related to the Lewis Statements, the Court would certify the defined class of former Countrywide stockholders.” Moreover, the Court found that except for “the problems with the scope of the release, the settlement … would be approved.” While the Court denied the plaintiffs application for class certification and approval of the settlement for now, he did note that the parties had a number of options including (1) amending the class structure to allow for opt-out rights; (2) amending the release contained in the Proposed Settlement to carve out the common law fraud claims with respect to the Lewis Statements; or (3) abandoning their efforts to settle this litigation altogether.

 

The U.S. Chamber of Commerce released its annual survey of the legal systems of the 50 states according to corporate lawyers who were polled, and for the 7th year in a row, the Delaware court system retained its number 1 ranking among the states in most categories. Here is a link to the report.  The Delaware Business Litigation Report has a post here on the story. The results of last year’s survey ranking Delaware as number 1 were posted here on this blog.

Once again, for the 6th year in a row, Delaware ranked first among all the states based on a survey by the U.S. Chamber of Commerce of each state’s legal climate/court system, as reported today by The Wall Street Journal Law  Blog  here, with links to the actual survey results.  (Of course, the motto for Delaware for as long as anyone can remember has always been:  "The First State".)