On June 26, 2015, Delaware’s governor signed into law a bill that prevents Delaware corporations from adopting “loser-pays” fee-shifting provisions for certain lawsuits against companies and their boards of directors. The same bill enshrines into law the ability of companies to establish Delaware as the exclusive forum for certain shareholder litigation.
The issue over loser-pays bylaws escalated in 2014, when the Delaware Supreme Court issued an opinion in ATP Tours Inc. v. Deutscher Tennis Bund, in which it upheld a loser-pays provision in the organizing documents of a limited liability company. Following this decision, certain Delaware corporations began adopting such bylaws in the hope that the Delaware Supreme Court’s opinion would be extended to cover typical corporations.
In response, later in 2014, legislation was proposed in Delaware to ban such provisions, but that legislation was quickly tabled in the face of opposition from business groups. This opposition, led by the U.S. Chamber of Commerce, resurfaced when the legislation was reintroduced in 2015, but this time institutional investors as well as law firms representing plaintiffs and defendants largely supported the legislation, arguing that loser-pays bylaws would have the effect of deterring meritorious suits and would largely eliminate shareholder litigation in Delaware (and potentially beyond). Advocates for shareholder rights succeeded in securing the passage of the bill, which bans loser-pays provisions in cases involving “intracorporate” claims, meaning claims arising under Delaware’s statutory law (i.e., claims against a corporation or its board for breach of fiduciary duty).
Even with the passage of this new law, questions remain. For example, arguably vague language in the bill concerning the scope of covered actions has caused debate over whether the prohibition would apply to securities class actions, antitrust and other fraud suits. Moreover, while shareholder advocates were successful in this skirmish, we expect to see new efforts by business groups to curtail the ability for shareholders to enforce their rights through litigation. But for now, shareholders should celebrate this legislative victory.