Delaware Legislature Says No to “Loser-Pays” Fee-Shifting Bylaws But Yes to Forum-Selection Bylaws for Stock Corporations: A Partial Legislative Response to ATP Tour, Inc. v. Deutscher Tennis Bund, Which Held That Fee-Shifting Bylaws Adopted by Delaware Nonstock Corporations Could Be Valid

Sullivan & Cromwell LLP - June 12, 2015

On May 12 and June 11, 2015, the Delaware Senate and House of Representatives, respectively, passed a bill (the “Bill”) that would amend Title 8 of the Delaware General Corporation Law (“DGCL”) to prohibit Delaware stock corporations from including in their charters or bylaws so-called “loser-pays” fee-shifting provisions in connection with “internal corporate claims” brought by stockholders.  Following the Delaware Supreme Court’s May 2014 decision in ATP Tour, Inc. v. Deutscher Tennis Bund, in which the Court held that “fee-shifting provisions in a non-stock corporation’s bylaws can be valid and enforceable,” it was unclear to some practitioners whether fee-shifting provisions in the charter or bylaws of Delaware stock corporations would be enforceable.  The Bill would resolve that uncertainty by prohibiting stock corporations from adopting such provisions with respect to “internal corporate claims,” such as the claims typically brought by shareholders in Delaware in M&A and corporate governance litigation.

A second important aspect of the Bill is its codification of Delaware case law allowing a Delaware stock corporation to adopt forum-selection bylaws requiring that internal corporate claims be brought either exclusively in the Delaware courts or in courts of one or more states, so long as the Delaware courts are included as an available forum.  The Bill would prohibit, however, forum-selection provisions that select an out-of-state forum as the exclusive jurisdiction.

The Bill, which Governor Markell is expected to sign, provides that the changes will be effective on August 1, 2015.