Delaware Fee-Shifting Bill Shelved For 2014

A joint resolution of the Delaware State Senate and House of Representatives, with the approval of Governor Markell, has shelved a bill to ban Delaware stock corporations from adopting bylaw provisions to shift attorneys’ fees and expenses in corporate litigation to unsuccessful plaintiffs.

The bill was drafted and approved by the Delaware State Bar Association and presented to the General Assembly following the May 8, 2014, en banc response of the Delaware Supreme Court to certified questions of law from the U.S. District Court for the District of Delaware in ATP Tour, Inc. v. Deutscher Tennis Bund (German Tennis Federation), et al., No. 534, 2013 (Del. May 8, 2014). The Supreme Court stated in ATP that a “fee shifting” bylaw provision in a non-stock corporation’s bylaws “can be valid and enforceable under Delaware law.” The bylaw at issue would shift the company’s defense fees and costs to a member who had sued the company (or any other member) and was unsuccessful in “substantially achiev[ing], in substance and amount, the full remedy sought” in the litigation.

The draft bill, which would prohibit fee-shifting provisions in the bylaws of stock corporations, would have been effective by its own terms on August 1, 2014.

The General Assembly’s resolutions recite that “the Governor and the Delaware General Assembly strongly support a level playing field that provides the ability for stockholders and investors to seek relief on its merits in the Courts of this State and believe that a proliferation of broad fee-shifting bylaws for stock corporations will upset the careful balance that the State has strived to maintain between the interests of directors, officers, and controlling stockholders, and the interests of other stockholders.”

The resolution further provides that the issue is a complex one requiring time to allow interested parties to provide comments and to participate in a “a comprehensive legislative response to the issues raised in this resolution and the ATP Tours decision.”

The resolution ultimately directs the Delaware State Bar Association to continue to examine, among other things, the “permissible scope of provisions of the certificate of incorporation, bylaws, or other similar business entity documents affecting the conduct of and the forum for litigation involving claims arising under Delaware’s business entity laws.” The bill is expected to be taken up again by the next General Assembly in 2015.

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The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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