Proposed Delaware Legislation Would Prohibit Fee-Shifting Provisions for Stock Corporations

Time 9 Minute Read
March 12, 2015
Legal Update

As previously noted,1 last year the Delaware General Assembly (DGA) was presented with proposed amendments to the Delaware General Corporation Law (DGCL) that would prohibit the adoption of a fee-shifting provision by Delaware stock corporations in their charters or bylaws. The amendments were proposed in response to the Delaware Supreme Court’s ATP Tour, Inc. v. Deutscher Tennis Bund decision2 upholding the facial validity of a bylaw provision adopted by a non-stock membership corporation shifting attorneys’ fees and expenses to unsuccessful plaintiffs in intra-corporate litigation.

The bill containing the proposed DGCL amendments was ultimately withdrawn,3 and Senate Joint Resolution No. 12 was adopted and asked for continued examination of the proposed amendments relating to fee-shifting bylaws and other aspects of corporate litigation.4

After further consideration, the Corporation Law Council (Council),5 a committee of the Delaware State Bar Association (DSBA), recently recommended amendments to the DGCL6 that, if adopted, would:

  • prohibit fee-shifting provisions in the charters and bylaws of stock corporations;
  • statutorily validate charter and bylaw provisions that require any or all “intracorporate claims” be brought solely and exclusively in any or all of the Delaware state and federal courts (these provisions are generally referred to as forum selection provisions or clauses); 
  • eliminate certain “de minimis” stockholder appraisal suits against national stock exchange-traded corporations following a merger or consolidation; and
  • stop appraisal claims from accruing interest under certain conditions.

In connection with the publication of the proposed amendments, the Council released documents explaining its rationale for the amendments. 

The proposed DGCL amendments remain subject to the approval of the DSBA Corporation Law Section and the DSBA Executive Committee. If approved by the DSBA, the proposed amendments would be introduced to the DGA for consideration and, if adopted by the DGA, would become effective August 1, 2015.

Since the proposed amendments relate to the DGCL and apply to Delaware corporations, they do not impact Delaware limited liability partnerships, limited liability companies and similar creatures of contract.

Fee-Shifting Provisions Would Be Prohibited

Similar to the amendments proposed last year by the Council, if adopted, the recently proposed DGCL amendments would prohibit charters and bylaws from including provisions that “would impose liability on a stockholder for the attorneys’ fees or expenses of the corporation or any other party in connection with an intracorporate claim.”7 The proposed amendments would apply only to stock corporations, as non-stock corporations would be permitted to adopt such fee-shifting provisions in accordance with ATP Tour.

The proposed amendments would not invalidate such fee-shifting provisions in a stockholders agreement or other writing signed by the stockholder against whom the provision is to be enforced.

We find it interesting that the Council is proposing DGCL amendments allowing corporations to bind stockholders by bylaw or charter to litigate intracorporate claims exclusively in Delaware, no matter the expense or burden, on the theory that assent can be inferred by investment, while invalidating fee-shifting provisions in the same bylaw or charter. Stockholder assent by investment is validated when Delaware courts are exclusively designated, but not where other courts are or where the expense of litigation is borne by a non-prevailing plaintiff. The Council maintains that such difference is warranted for a variety of reasons, including that the widespread adoption of fee-shifting provisions would be “severe” and make even meritorious stockholder litigation “untenable,” and that “[b]ecause the consequences of any corporate decision affect investors only commensurately with the scope of their investments, few stockholders will rationally be able to accept the risk of exposure to millions of dollars in attorneys’ fees to attempt to rectify a perceived corporate wrong, no matter how egregious.” Moreover, the Council expressed concern that widespread adoption of fee-shifting provisions would curtail the development of the common law of Delaware corporations due to the resulting lack of stockholder litigation. In the Council’s view, this would eliminate the only “effective enforcement mechanism for statutory or fiduciary obligations” resulting in a potential diminishment in investor confidence and adverse impacts on capital formation, and create a regulatory vacuum that the federal government or state attorney generals may seek to fill.

Forum Selection Provisions Would Be Validated

Despite seeking to prohibit fee-shifting provisions for stock corporations, the Council asserts that it is taking a “strong step” to curb abusive stockholder litigation in the proposed amendments by allowing forum selection provisions that address “intracorporate claims” in charters and bylaws. The Delaware Chancery Court has previously upheld the facial validity of forum selection bylaw provisions.8 The proposed amendments would statutorily validate such forum selection provisions. However, as is currently the case, forum selection provisions would be subject to challenge on an “as-applied” basis based on the facts and circumstances surrounding their adoption.

If adopted, the proposed amendments would allow, consistent with applicable jurisdictional requirements, charters and bylaws to include provisions that require any or all “intracorporate claims” to be brought solely and exclusively in any or all of the Delaware state and federal courts. Interestingly, the proposed amendments would prohibit charter and bylaw provisions that select the courts of another state as the exclusive forum for intracorporate claims if they would preclude stockholders from bringing their claims in the Delaware courts. However, the proposed amendments do not address the validity of a charter or bylaw provision that selects a non-Delaware forum as an additional forum in which intracorporate claims may be brought.

The proposed amendments would not prevent the application of any such forum selection provision in a stockholders agreement or other writing signed by the stockholder against whom the provision is to be enforced.

Amendments to Curb Appraisal Right Abuses

Another part of the Council’s proposed amendments is intended to help curb abusive stockholder litigation associated with appraisal proceedings. If adopted, the proposed amendments would:

  • eliminate stockholder appraisal suits against national stock exchange-traded corporations following a merger or consolidation unless (1) the value of the merger consideration for the total number of shares entitled to appraisal exceeds $1 million, (2) the total number of shares entitled to appraisal exceeds one percent of the outstanding shares entitled to appraisal, or (3) the merger was a short-form merger approved pursuant to DGCL Sections 253 or 267; and
  • prevent the subsequent accrual of interest on any amount paid by the corporation (in its sole discretion) to the dissenting stockholders before final judgment is entered in the appraisal proceedings, although interest would still accrue after such payment on any amount by which the appraisal award exceeds such payment.

These amendments would be effective with respect to transactions that closed pursuant to agreements entered into on or after August 1, 2015 and any appraisal proceedings arising out of such transactions.

What Now?

Since the proposed amendments face additional approvals before they can become law, Delaware corporations should not take any immediate action in response to the proposed amendments. The amendments related to forum selection provisions and appraisal rights will likely be uncontroversial. However, as was the case last year, the DGA will likely hear from interested parties on both sides of the fee-shifting debate, and if ultimately approved by the DGA, the final version of the bill containing the DGCL amendments may differ from the initial version proposed by the Council. Indeed, the U.S. Chamber Institute for Legal Reform has already condemned the proposed fee-shifting amendments. Due to the continued debate over fee-shifting provisions, the DGA could very well withhold voting on the bill until the end of its legislative session in June 2015 to ensure it has adequately considered all viewpoints and comments.

As we cautioned last year, Delaware stock corporations should continue to heed the warning found in the Senate Joint Resolution that any fee-shifting charter or bylaw provisions adopted before the DGA weighs in may be invalidated by subsequently-enacted legislation. Although the proposed amendments did not come from the DGA, the fact that the Council again recommended prohibiting fee-shifting provisions indicates that the debate to allow fee-shifting provisions for stock corporations may not be successful.

As noted by the Council, Delaware corporations may, consistent with recent Delaware jurisprudence, continue to consider the adoption of “reasonable litigation regulating” bylaws to address abusive stockholder litigation tactics. However, boards of Delaware corporations should carefully consider whether such a bylaw is in their corporation’s best interest and consult with outside counsel and possibly institutional investors before proceeding.


1. Please see our client alert dated June 2, 2014, Proposed Legislation Would Prohibit Fee-Shifting Bylaws for Delaware Stock Corporations.

2. 91 A.3d 554 (Del. 2014). For a discussion of the Court’s decision, please see our client alert dated May 15, 2014, Delaware Supreme Court Finds Fee-Shifting Bylaw Permissible.

3. Please see our client dated June 24, 2014, Delaware Delays Consideration of Proposed Prohibition on Fee-Shifting Bylaws for Delaware Stock Corporations.

4See Delaware State Senate 147th General Assembly, Senate Joint Resolution No. 12 (Jun. 18, 2014), available at http://legis.delaware.gov/LIS/lis147.nsf/vwLegislation/SJR+12/$file/legis.html.

5. The Council is a committee of the DSBA, and consists of lawyers that regularly represent corporations and their directors and officers in transactions and litigation, and lawyers that regularly represent stockholder plaintiffs. Each year, the Council drafts recommended amendments to the DGCL.

6. The proposed bills can be found by clicking here.

7. The proposed amendments define “intracorporate claims” to mean “claims, including claims in the right of the corporation, (i) that are based upon a violation of a 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.” Examples of intracorporate claims include “claims arising under the DGCL, including claims of breach of fiduciary duty by current or former directors or officers or controlling stockholders of the corporation, or persons who aid and abet such a breach.”

8See Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934, 940 (Del. Ch. 2013). Please see our client alert on this decision dated July 2, 2013, Board-Adopted Forum Selection Bylaws Upheld by Delaware Court of Chancery.

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