Shareholder litigation is, nowadays, a common response to any announced public company transaction. Despite the fact that the challenged transaction usually involves entities and claims that are governed by Delaware law, this litigation, in many instances, is filed in multiple states. The fact that litigation could be, and is, filed in multiple jurisdictions, leads to increased costs and burdens to corporations.
These additional burdens may include dueling discovery tracks and even inconsistent court rulings on identical issues. This makes the original public company transaction more expensive and complicated. In response to this inevitable litigation, many corporations had added provisions to their corporate documents to curtail shareholder litigation.
However, on August 1, 2015, new amendments to Delaware General Corporation Law (DGCL) went into effect that addressed the legality of corporate provisions designed to combat this shareholder litigation. In summary, these amendments now invalidate fee-shifting provisions but authorize certain forum selection provisions.
Generally, unless otherwise agreed to in contract, in the United States each litigant handles paying its own attorney fees and court costs. Fee-shifting provisions acted to shift the fees to the plaintiff in the event they were not successful. This made it riskier for plaintiffs to bring lawsuits against a corporation, since the shareholder understood that if they lost, they would have to bear the defendant’s litigation costs.
Thus, since only plaintiffs with strong cases were likely to proceed and risk an expensive loss, the provisions effectively chilled potential shareholder litigation. Much like anti-takeover poison pill, fee-shifting provisions acted like anti-shareholder-lawsuit poison pill.
However, the new amendments to Sections 102 and 109 of the DGCL were designed to eliminate these provisions. New DGCL Sections 102(f) and 109(b) provide that corporate documents may not contain any provision imposing liability on a shareholder for the attorney fees or expenses of the corporation or any other party in connection with an “internal corporate claim” as defined in new Section 115.
Forum Selection Provisions
While Delaware banned fee-shifting provisions, it still took measures to curtail shareholder litigation, by targeting multi-forum litigation in particular. New Section 115 of the DGCL provides that the corporate documents, (1) may contain a provision requiring that any or all intra-corporate claims be brought exclusively in any or all courts of the state of Delaware, and (2) may not contain a provision prohibiting such claims from being brought in Delaware courts.
In other words, Section 115 permits a corporation to select Delaware or both Delaware and another state for resolving intra-corporate disputes. The new Section 115 also prevents a corporation excluding Delaware as an available forum. For example, if a Delaware corporation has its corporate headquarters in New York, it would be permissible for it to adopt a provision designating both New York and Delaware as the exclusive forum, but impermissible it to prescribe only New York as the exclusive forum. Thus, Section 115 of the DGCL allows for corporate provisions that can serve as a bulwark against abusive stockholder litigation by limiting the amount of suits that could be initiated in multiple jurisdictions.
Although the 2015 amendments do not permit fee-shifting bylaw provisions, which would have curtailed stockholder litigation generally, they curtail multi-forum stockholder litigation specifically through the allowance of forum selection provisions.
Delaware corporations contemplating a public company transaction should consider including forum selection provisions in their corporate documents. Not only will a forum selection provision prevent the corporation from incurring the costs and burdens associated with multi-forum litigation, it will ensure that such shareholder disputes are resolved by Delaware’s marquee business courts. These types of provisions will allow corporations greater confidence that they can defend against litigation without concern that shareholders in other states will attempt to undermine such efforts.
Corporations that have already adopted forum selection provisions prior to the 2015 amendments should review them to make sure that they are consistent with the new DGCL Section 115. Moreover, corporations that have adopted fee-shifting provisions should consider whether to amend their bylaws to remove such provisions to avoid a claim that the provisions violate the DGCL.
Finally, it is important to remember that these new amendments do not prohibit fee-shifting or forum selection provisions in stockholders agreements or other writings signed by a stockholder against whom the provision is sought to be enforced. Furthermore, these amendments will not impact other types of business entities; such as limited liability companies, which are governed by separate statutory provisions.