Two men share securities regulation news

Breaking news and expert analysis on legal and compliance issues

[Back To Home][Back To Archives]

From Securities Regulation Daily, June 25, 2015

Delaware enacts anti-fee shifting, exclusive forum provisions

By John M. Jascob, J.D.

Delaware Governor Jack Markell has signed into law controversial legislation prohibiting Delaware stock corporations from shifting expenses to shareholders when litigating internal corporate claims.  S.B. 75 also permits corporations to adopt charter or by-law provisions that require internal corporate claims to be brought exclusively in the Delaware courts. The fee-shifting and forum selection amendments become effective on August 1, 2015.

The legislation also contains other significant changes to the Delaware General Corporation Law (DGCL), including amendments making it easier for an existing corporation to become a “public benefit corporation” or for an existing public benefit corporation to cease to have public benefit corporation status. S.B. 75 also provides a “market out” exception to shareholders’ statutory appraisal rights when a corporation converts to a public benefit corporation. Other changes include provisions that allow greater flexibility in stock issuances and simplify the provisions for ratifying defective corporate acts.

Ban on free-shifting provisions. The ban on fee-shifting provisions by stock corporations follows the Delaware Supreme Court’s decision last year in ATP Tour, Inc. v. Deutscher Tennis Bund, where the court upheld the fee-shifting provisions in a non-stock corporation’s bylaws. S.B. 75 does not upset that ruling in relation to non-stock corporations, but adds a new Section 102(f) to the DGCL with respect to stock corporations. Section 102(f) prohibits a stock corporation from including any provision, in either its certificate of incorporation or its by-laws, that would impose liability on a shareholder for the corporation’s attorney fees or expenses in connection with an internal corporate claim, as defined in new Section 115.

The U.S. Chamber of Commerce criticized the legislation, stating that S.B. 75 has removed an “important and useful tool” for combating abusive merger and acquisition lawsuits.  Lisa A. Rickard, president of the Chamber’s Institute for Legal Reform, warned that all eyes will now be on the response of the Delaware courts. "In passing this new law, Delaware has also effectively authorized consolidation of much of merger-and-acquisition litigation in its own courts and promised the business community that its system will not tolerate lawsuit abuse and will fairly and actively weed out frivolous shareholder cases. The business world will be watching carefully to see if that promise holds true," Rickard said in a news release.

Forum selection provisions. The “consolidation” mentioned by the Chamber refers to new DGCL Section 115, which provides that a corporation’s certificate of incorporation or bylaws may require any internal corporate claims to be brought exclusively in the state or federal courts in Delaware. Moreover, no provision of the certificate of incorporation or the bylaws may prohibit bringing such claims in Delaware. Section 115 defines "internal corporate claims" to mean claims arising under the DGCL, including derivative claims of a breach of fiduciary duty by current or former directors or officers or stockholders of the corporation.

Section 115 thus confirms the Chancery Court's ruling in Boilermakers Local 154 Retirement Fund v. Chevron Corp., where the court upheld bylaws requiring that matters regarding internal corporate affairs be litigated in Delaware. The statute does not prohibit a corporation, however, from designating a forum other than the Delaware courts as an additional forum in which internal corporate claims may be brought.

Public benefit corporations. The legislation amends DGCL Section 363(a) to ease the standards by which an existing corporation may amend its charter to become a public benefit corporation. The statute now permits a corporation to convert to public benefit corporation status following an affirmative vote of two-thirds of the shares entitled to vote. Previously, Section 363(a) required the approval of 90 percent of the outstanding shares of each class of stock, whether voting or nonvoting.  S.B. 75 also amends Section 363(c) to permit an existing public benefit corporation to cease being a public benefit corporation with the approval of two-thirds of the shares entitled to vote.

Under amendments to Section 362(c), the names of public benefit corporations are no longer required to include a specific identifier such as “public benefit corporation,” “P.B.C.,” or “PBC.” Instead, the statute now requires that a public benefit corporation whose name does not include such language to provide prior notice before issuing unissued shares of stock or disposing of treasury shares. The public benefit corporation does not need to provide notice, however, if the issuance or disposal is part of an offering registered under the Securities Act or if, at the time of issuance or disposal, the corporation has a class of securities registered under the Exchange Act.

The legislation amends DGCL Section 363(b) to provide a “market out” to the appraisal requirements for certain transactions involving public benefit corporations. No appraisal rights will now be available for the shares of any class or series of stock: (1) listed on a national securities exchange or (2) held of record by more than 2,000 holders, unless, in the case of a merger or consolidation, the holders of that stock are required by the terms of the merger or consolidation agreement to accept as consideration anything except shares of stock or depository receipts that will be either listed on a national securities exchange or held of record by more than 2,000 holders; cash in lieu of fractional shares or fractional depository receipts; or any combination of listed shares and cash.

MainStory: TopStory CorporateGovernance DelawareNews

Securities Regulation Daily

Introducing Wolters Kluwer Securities Regulation Daily — a daily reporting service created by attorneys, for attorneys — providing same-day coverage of breaking news, court decisions, legislation, and regulatory activity.


A complete daily report of the news that affects your world

  • View full summaries of federal and state court decisions.
  • Access full text of legislative and regulatory developments.
  • Customize your daily email by topic and/or jurisdiction.
  • Search archives for stories of interest.

Not just news — the right news

  • Get expert analysis written by subject matter specialists—created by attorneys for attorneys.
  • Track law firms and organizations in the headlines with our new “Who’s in the News” feature.
  • Promote your firm with our new reprint policy.

24/7 access for a 24/7 world

  • Forward information with special copyright permissions, encouraging collaboration between counsel and colleagues.
  • Save time with mobile apps for your BlackBerry, iPhone, iPad, Android, or Kindle.
  • Access all links from any mobile device without being prompted for user name and password.