Delaware Proposes Amendments to Bylaws

The Council of the Corporation Law Section of the Delaware State Bar Association recently proposed amendments to the Delaware General Corporation Law (DGCL) prohibiting fee-shifting provisions in the corporation’s bylaws. In addition, the proposed amendments would allow Delaware corporations to designate Delaware courts for litigation, but it would also prohibit Delaware corporations from selecting another jurisdiction for that litigation.

Amendment to Ban Fee-Shifting Provisions

Currently, under Delaware General Corporation Law, a corporation may adopt a bylaw to hold an unsuccessful plaintiff responsible for the defendant’s attorney’s fees (i.e., fee-shifting provision). These provisions pose a risk to shareholders of incurring fees in an unsuccessful suit.

To prevent the negative effects on shareholders, the Council would like to amend the DGCL, releasing the stockholders from liability for the attorney’s fees related to an intracorporate claim.

“Intracorporate claims are defined as claims, including claims in the right of the corporation that (i) are based upon a violation of a duty by a current or former director or officers or stockholder in such capacity, or (ii) as to which this title confers jurisdiction upon the Court of Chancery.”

An increase in fee-shifting provisions would generate too much risk for stockholders. Most stockholders would be averse to litigating corporate wrongs because of the unpredictable costs in attorney’s fees. A decrease in corporate litigation would affect the development of corporate common law.

In this situation, the Council argues that the solution is to ban fee-shifting provisions. Then, rely on judicial tools such as motions to dismiss, Rule 11 motions, and court-ordered fee-shifting to control unworthy corporate litigation.

Amendment to Permit Delaware-Only Forum Selection Provisions

The proposed amendments would also require corporations to bring intracorporate claims in any of the courts within the state of Delaware as the exclusive forum for litigation. Furthermore, Delaware corporations would be precluded from selecting a court outside of the state as the exclusive forum for litigation.

Chip Phinney, Delaware Bar Proposes Amendments to Ban Fee-Shifting Provisions and Allow Delaware- Only Forum Selection Provisions in Corporate Charters and Bylaws, (Mar. 26, 2015).