Yesterday, the Delaware House of Representatives unanimously passed a bill prohibiting publicly traded corporations from adopting bylaws that force shareholders to pay legal fees if they do not prevail in lawsuits asserting internal corporate claims against Delaware corporations. The bill would also allow Delaware corporations to designate Delaware – but not any other state – as the exclusive forum for internal corporate claims. The Delaware Senate passed the same bill last month, as we reported here. The bill now heads to Governor Jack Markell for signature.
This legislation has been in the making since May 2014, when the Supreme Court of Delaware held in ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A.3d 554, 555 (Del. 2014), that “fee-shifting provisions in a non-stock corporation’s bylaws can be valid and enforceable under Delaware law.”
The legislation would also put to rest the question of whether Delaware law allows the board of a Delaware corporation to adopt a bylaw designating an exclusive forum other than Delaware for intra-corporate disputes. In City of Providence v. First Citizens BancShares, Inc., 99 A.3d 229, 234 (Del. Ch. 2014), the Delaware Court of Chancery – relying on the analysis in an earlier case, Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013) – upheld the validity of a forum selection bylaw that designated an exclusive forum other than Delaware for intra-corporate disputes. The Chancery Court explained that “nothing in the text or reasoning of [Boilermakers] can be said to prohibit directors of a Delaware corporation from designating an exclusive forum other than Delaware in its bylaws.”
We will keep you apprised of further developments concerning the use of bylaws to define the bounds of shareholder litigation.