On June 24, Delaware’s Governor signed Senate Bill No. 75 into law and closed the door on the tantalizing prospect of fee shifting (“loser pays”) bylaws for Delaware stock corporations. The full text of the bill can be read here. The heavily negotiated bill is a blunt, legislative reaction to the Delaware Supreme Court’s May 8, 2014 decision in ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A.3d 554 (Del 2014) permitting fee-shifting bylaws for non-stock corporations and discussed in an earlier Legal Alert. See Fee Shifting Bylaw Facially Valid Under Delaware Law here. Many practioners believed that ATP Tour’s analysis supported the enforceability of fee-shifting bylaws for stock corporations too, and looked forward to seeing that belief become a reality. Others were alarmed that such bylaws would, as a practical matter, halt meritorious shareholder lawsuits from ever being filed. The Delaware Bar’s Corporation Law Council expressed its concerns shortly after the ATP Tour decision was issued:

The Council believes that absent legislation, many Delaware corporations will eventually adopt ATP-type provisions… If such adoption became widespread, the effects on stockholder litigation would be severe. Every lawsuit is a risk; no one can confidently predict the outcome at the start. Moreover, virtually no lawsuits of any type substantially achieve in substance and amount the full remedy sought as the ATP bylaw contemplates. If fee shifting on such a broad basis is possible, even successful litigations could result in plaintiffs having to reimburse opponents’ attorneys’ fees. Because 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.

In contrast, the U.S. Chamber of Commerce’s Institute for Legal Reform argued that the use of legislation to bar fee-shifting bylaws would “only protect frivolous lawsuits” and that the use of fee-shifting bylaws “gives corporations a way to protect shareholders against these costs of abusive litigation.”

Both camps anticipated that the issue of fee-shifting bylaws for stock corporations would be litigated sooner rather than later in Delaware. Senate Bill No. 75 douses that anticipation.

What Delaware Senate Bill No. 75 Does and Does Not Do

First, it does not overturn the ATP Tour, Inc. decision allowing fee-shifting bylaws for Delaware non-stock corporations. It only applies to stock corporations.

Second, Section 5 of the bill does prohibit the adoption of bylaws by Delaware corporations that specify exclusive forums other than Delaware. The Delaware legislature, promoting Delaware’s courts, intends to centralize shareholder litigation in Delaware. Thus, the validity of exclusive forum selection bylaws adopted by Delaware corporations is reiterated, but the exclusive forum must be Delaware.

The Takeaway

In some respects, it is disappointing that the Delaware legislature could not have fashioned a compromise between the American Rule, where each party pays its own attorneys' fees, and created a legislative cap on fees in shareholder lawsuits. On the bright side, Senate Bill No. 75 allows Delaware corporations to mandate that shareholder lawsuits arising out of internal disputes be litigated in Delaware, which should curtail plaintiff forum shopping in the future.