Delaware Legislature Rejects Fee Shifting

Delaware Legislature Rejects Fee Shifting

      In ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A.3d 554 (Del. 2014), in the context of a nonprofit corporation, the Delaware Supreme Court affirmed the validity of a provision added to the corporation’s bylaws providing, inter alia, that if a member of the corporation should bring a derivative action and not substantially prevail, they must pay all of the defense costs incurred in connection with the action. In effect, similar bylaw provisions (alternatively, these requirements could be set forth in the certificate of incorporation) have the effect of insulating the directors and officers from challenges for breach of fiduciary duty. The Delaware General Assembly has passed, and there is every expectation that the governor will sign, amendments to the Delaware General Corporation Law providing, essentially, that fee shifting provisions in either the certificate or the bylaws will not be effective.

      Specifically, Senate Bill 75, with respect to stock corporations (the contrary rule as set forth in ATP Tour for nonstock/nonprofit corporations is not modified), adds a new subsection (f) to section 102 to provide:

The certificate of incorporation may not contain any provision that would impose liability on a stockholder for the attorneys’ fees or expenses of the Corporation or any other party in connection with an internal corporate claim, as defined in § 115 of this title.

In a similar vein, there is added to section 109 of the DGCL:

The bylaws may not contain any provision that would impose liability on a stockholder for the attorneys’ fees or expenses of the Corporation or any other party in connection with an internal corporate claim, as defined in § 115 of this title.

      The referenced definition of “internal corporate claims” of section 115 is to “claims, including claims in the right of the corporation, (i) that are based upon a violation of the duty by a current or former director or officer or stockholder in such capacity, or (ii) as to which this title confers jurisdiction upon the Court of Chancery.”

      This is an important development in the law as it preserves the ability of shareholders and, on the appropriate facts, other stakeholders such as creditors to bring actions challenging the discharge of fiduciary obligations by corporate directors and officers. That said, it is unfortunate that Delaware has not extended this amendment to nonstock corporations. Essentially, the adoption of fee shifting bylaws by charities organized in Delaware remains, at this time, permissible.

      It bears noting that fee shifting in stockholder agreements remains permissible.  Investors need to carefully review stockholder and similar agreements to assess what fee shifting provision they contain.

      Senate Bill 75 enacts a number of other amendments to the Delaware General Corporation Law; those changes will be reviewed in future postings.