Last month, I blogged about how the Delaware legislature was barreling towards passing legislation to reverse the impact of the ATP Tour v. Deutscher Tennis Bund decision. In the wake of this Delaware Senate resolution, here’s comes news from this WSJ blog:
Score this round for the U.S. Chamber of Commerce. The group representing business interests has won, at least for now, a fight in the Delaware legislature over whether companies can foist their legal bills onto shareholders who sue them and lose.
The Delaware legislature has postponed until early 2015 discussion of a proposed bill that had drawn heat from the Chamber, among others, the bill’s sponsor confirmed Wednesday. The bill would have banned companies from shifting the costs of losing cases onto the stockholders who bring them. “I certainly believe that we should not permit companies carte blanche to adopt these kinds of bylaws,” Sen. Bryan Townsend, who sponsored the bill, said in an interview. “But we have heard from a broad group of stakeholders and thought it best to take the coming months to continue our examination of the issue.”
The fight bubbled up after Delaware Supreme Court ruling last month that upheld a fee-shifting bylaw adopted by a private company, ATP Tour Inc. Some corporate lawyers said the ruling might open the door to public companies adopting similar “loser pays” provisions in an effort to deter shareholder litigation, which has skyrocketed in recent years. Such cases are now nearly automatic after the announcement of a merger, and rarely result in substantial gains for shareholders.
A section of the state bar quickly crafted legislation to ban companies from adopting such bylaws, and presented the measure to the legislature, which had been set to vote last week. But the Chamber opposed the bill, which it said “takes away a new tool … [that] businesses could use to reduce the amount of unnecessary litigation that accompanies corporate mergers,” according to a letter sent to Mr. Townsend June 5 and reviewed by The Wall Street Journal.
Others joined the fray. Dole Foods Co. also sent a letter to Mr. Townsend, the News Journal has reported. And more quietly, E. I. du Pont Nemours & Co., one of Delaware’s biggest and most influential companies, has quietly lobbied against the legislation, according to people familiar with its efforts. A DuPont spokesman confirmed that the company opposes the bill, but declined to comment further. DuPont’s intervention likely carried considerable weight in Delaware, where it was founded in 1802 as a gunpowder maker along the banks of the Brandywine Creek. It is the only Fortune 250 company based in the state, despite the dozens that claim it as their legal home, and its name is plastered around Wilmington, where its headquarters take up an entire city block.
Kevin LaCroix has more here:
For the time being, it is unclear whether or not fee-shifting bylaws will be permitted in Delaware. The Skadden law firm’s memo urges caution for companies considering the adoption of fee-shifting bylaws. As the memo notes, “there is a significant risk that adoption of fee-shifting bylaws could generate a meaningful adverse reaction from, among others, governance advocates, proxy advisory firms, and some stockholders.”
Even though the Delaware legislature will not be acting until 2015 at the earliest, there are good reasons for companies to proceed cautiously in considering the adoption of a fee-shifting bylaw. The law firm memo outlines a number of specific items for companies to consider in that regards, including, for example, the company’s stockholder profile and its relationship with its shareholder base.
While the memo urges caution on fee-shifting by laws, the law firm continues to believe that companies should consider the adoption of forum selection by laws. As I discussed in a recent post (here), even though questions continue to surround the possibility that companies might be able to try to control abusive shareholder litigation through the use of fee-shifting bylaws, the adoption of forum selection bylaws has become increasingly common as a possible way to try to “reduce the cost and risk of multi-jurisdictional stockholder litigation.”