by Cydney Posner
As noted in this Reuters post, the Council of Institutional Investors, along with a number of individual pension funds and other institutional investors, have chimed in on the debate currently roiling the Delaware bar over fee-shifting bylaws, sending letters to the governor of Delaware, the chair of the state bar’s corporation law section, as well as ISS and Glass Lewis, in support of a legislative prohibition on these bylaws.
As discussed in this Cooley Alert and this PubCo post, generally, under the so-called “American rule,” parties to litigation must pay their own attorneys’ fees and costs. A fee-shifting bylaw or charter provision, however, obligates a stockholder-plaintiff in intra-corporate litigation to pay the company’s (and perhaps its directors’) legal fees and costs if the plaintiff is not “successful.” Under ATP, a fee-shifting bylaw adopted by a private non-stock corporation was held to be legally permissible under Delaware law, although whether a particular bylaw would be valid and enforceable in any individual case would still turn “on the circumstances surrounding its adoption and use,” in particular, whether the bylaw was “adopted or used for an inequitable purpose.” In addition, as noted in this PubCo post, it is possible that the ATP court never intended the holding of ATP to be extended to the public company context.
Following ATP, the Delaware corporate bar, concerned about the potential impact of ATP, advocated that the Delaware legislature adopt legislation to prohibit the adoption by stock corporations of fee-shifting provisions that would impose monetary obligations in the absence of individual consent. The legislature, faced with strong opposition from the Chamber of Commerce and others expressing concern about the high proportion of merger transactions subject to stockholder challenges, determined to postpone consideration of this legislation until 2015.
Now, as the author notes, “[i]nstitutional investors want to be sure that when the legislature reconsiders fee-shifting, their voices are as loud as the Chamber’s.” This letter from a group of public pension funds to the Governor of Delaware argues that, “the kind of fee-shifting bylaw approved in ATP Tour does not further stockholders’ interests by protecting corporations from ‘frivolous litigation.’ Instead, such provisions bar all judicial oversight by making it economically unfeasible for stockholders to seek redress in Delaware courts to protect their rights….They undermine the most fundamental premise of the corporate form – that stockholders, simply by virtue of their investment, cannot be responsible for corporate debts….Fee-shifting bylaws will foreclose meritorious stockholder claims [and] render illusory the fiduciary obligations of corporate directors.”
This letter from CII to the Chair of the Section of Corporation Law of the Delaware State Bar advocates that the Section recommend to the legislature “amendments to the DGCL that would overturn or narrow the decision.” Appealing to the interest of the bar in maintaining Delaware’s preeminence as a forum for resolving corporate litigation, CII contends that “if corporations are allowed to continue to unilaterally adopt fee-shifting provisions under the authority of the ATP Tour decision, the Delaware judiciary’s leadership role will diminish over time as fewer important business disputes will be brought before Delaware courts. Moreover, the accountability of corporations to long-term shareowners would decline as corporate officials who breach their fiduciary duties or commit other wrongdoing would become more insulated from meritorious legal challenges to those often value-reducing behaviors. Simply put, the ATP Tour decision is bad for Delaware and bad for long-term investors.”
But would action by Delaware even do the trick? As discussed in this PubCo post of October 13, in testimony before the SEC’s Investor Advisory Committee, Professor John Coffee wondered why the SEC was “sitting on the sidelines” of this issue. Instead, he advocated that the SEC get involved in the debate and recommended a variety of actions the SEC could take. Even if the Delaware legislature acted, Coffee contended, many corporations are incorporated outside of Delaware and would not be affected, especially if there were a “race to the bottom” among the states to attract corporations on the basis of allowance of these bylaw provisions. While the debate in Delaware may lead individual SEC examiners to require more expansive disclosure regarding the nature of fee-shifting provisions as part of the review-and-comment process, judgments regarding policy-related matters would likely require decision-making at levels higher up the SEC food chain. The SEC, however, has yet to wade in.