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Recent Amendment to Delaware General Corporation Law 07/06/2015

Posted by Morse, Barnes-Brown Pendleton in Legal Developments, Public Companies.
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By Joe Marrow

Corporate Attorney Joseph MarrowAs expected, on June 24, 2015, Delaware Governor Jack Markell signed into law legislation amending the Delaware General Corporation Law (DGCL) that will (1) prohibit “fee shifting” provisions in corporate “charter documents” (certificate of incorporation and by-laws) and (2) permit the use of forum selection clauses in charter documents.  The amendments become effective August 1, 2015.

The prohibition against “fee shifting” provisions was adopted in response to the Delaware Supreme Court’s 2014 decision in ATP Tour, Inc. v. Deutscher Tennis Bund (ATP Tour).  In ATP Tour, the Delaware Supreme Court upheld a by-law provision that required that a party suing a nonstock corporation must pay attorneys’ fees and other costs related to intracorporate litigation.  As a result of the ATP Tour decision, many Delaware stock corporations adopted “fee shifting” provisions in by-laws.  The legislation amending the DGCL prohibits the use of “fee shifting” provisions in the charter documents of Delaware stock corporations (the new legislation does not impact the use of such provision in nonstock corporations).  New DGCL Section 109(f) provides that a certificate of incorporation may not contain any provision imposing liability on a stockholder for the attorneys’ fees or costs of any other party in connection with an “internal corporate claim.”  Similarly, new DGCL Section 109(b) provides for the same prohibition in by-laws.  New DGCL Section 115 defines internal corporate claims as “claims, including claims in the right of the corporation, (i) that are based upon a violation of a duty by a current or former director or officer or stockholder in such capacity, or (ii) as to which this title confers jurisdiction upon the Court of Chancery.”  The amendment to the DGCL does not prohibit privately-negotiated contractual fee-shifting provisions (i.e., as contained in a stockholders agreement).

In an effort to limit litigation filed in multiple jurisdictions, many Delaware corporations have adopted forum selection clauses in their charter documents.  These clauses require that litigation asserting “internal corporate claims” may be brought exclusively in Delaware courts.  The new legislation codifies the Delaware Chancery Court’s holding in Boilermakers Local 154 Retirement Fund v. Chevron Corporation in which the court upheld the validity of a Delaware corporation’s adoption of a forum selection clause in its corporate by-laws.  New DGCL Section 115 authorizes Delaware charter documents to require that “internal corporate claims” be brought exclusively in Delaware courts.  The amendment to the DGCL does not prohibit Delaware corporations from selecting a forum other than Delaware as an additional forum to hear internal corporate claims.  In addition, the new legislation does not prohibit parties from privately contracting for the selection of a forum outside of Delaware as an exclusive forum to hear such disputes.

Delaware corporations should carefully review existing charter documents to determine if amendments are warranted by the new legislation.

Any questions regarding this topic, please feel free to contact Joe Marrow.

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