June 30, 2015
Delaware Bans “Loser Pays” Bylaws & Authorizes Exclusive Forum Bylaws
The Delaware Governor has signed the latest Delaware amendments into law, taking effect on August 1st. We’re posting memos in our “Exclusive Forum Bylaws” Practice Area (also see this blog about whether the new law impacts federal class actions). And here’s the intro from this Cooley blog:
On June 24, 2015, the Governor of Delaware signed into law amendments to the Delaware General Corporation Law proposed by the Delaware Bar’s Corporation Law Council and overwhelmingly passed by the Legislature regarding fee-shifting and forum selection provisions in Delaware governing documents. (See this post and this post.) More specifically, the amendments invalidate, in Delaware charters and bylaws, fee-shifting provisions in connection with internal corporate claims. “Internal corporate claims” are claims, including derivative claims, that are based on a violation of a duty by a current or former director or officer or stockholder or as to which the corporation law confers jurisdiction on the Court of Chancery. These claims include claims arising under the DGCL and 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 those breaches. However, as discussed in this post, federal securities class actions are not included. In addition, the new provision is not intended to prevent these types of provisions in a stockholders agreement or other writing signed by the stockholder against whom the provision is to be enforced.
The amendments also expressly authorize the adoption of exclusive forum provisions for internal corporate claims, as long as the exclusive forum is in Delaware. Although the amendment does not address the validity of a provision that selects, as an additional forum, a forum other than Delaware, the synopsis indicates that it “invalidates such a provision selecting the courts in a different State, or an arbitral forum, if it would preclude litigating such claims in the Delaware courts.” A different result is possible where there is a provision in a stockholders’ agreement or other writing signed by the stockholder against whom the provision is to be enforced. In addition, an exclusive forum may not be “enforceable if the Delaware courts lack jurisdiction over indispensable parties or core elements of the subject matter of the litigation,” and the amendment in not intended to preclude evaluation of whether the terms or manner of adoption of the exclusive forum provisions “comport with any relevant fiduciary obligation or operate reasonably in the circumstances presented.” Deputy Secretary of State Richard J. Geisenberger said 99.6% of companies that have a forum-selection bylaw choose Delaware as the preferred venue. And, no surprise, Delaware wants cases involving Delaware corporations to be tried in Delaware.