Delaware Enacts Legislation Endorsing Exclusive Forum Clauses and Prohibiting Fee-Shifting Provisions

June 26, 2015

On June 24, 2015, in a highly anticipated move, the State of Delaware enacted legislation that (1) allows corporations to require that internal corporate claims be brought in the courts of Delaware while also prohibiting the use of any other jurisdiction as the exclusive jurisdiction and (2) prohibits stock corporations from including fee-shifting provisions for internal corporate claims in their certificates of incorporation or bylaws.  The amendments take effect on August 1, 2015.

1.         Background.

Recent cases have focused attention on provisions aimed at more effectively managing certain types of stockholder litigation as the frequency and cost of this litigation have continued to escalate.  In particular, the decisions in ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A.3d 554 (Del. 2014), which upheld the use of fee-shifting bylaw provisions by a Delaware non-stock corporation, and Boilermakers Local 154 Retirement Fund v. Chevron, 73 A.3d 934, 963 (Del. Ch. 2013), which upheld a board’s ability to unilaterally adopt exclusive forum bylaw provisions, began a public discussion as to whether such provisions should be enforceable under Delaware law.  The State of Delaware has responded to this discussion by passing certain amendments (the “Amendments“) to the Delaware General Corporation Law (the “DGCL”), which address the validity of these provisions.

2.         Text of the legislation.

The Amendments contain several provisions governing how a Delaware corporation may address “internal corporate claims” in its certificate of incorporation and bylaws.  Internal corporate claims are defined in the new Section 115 of the DGCL 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 [the DGCL] confers jurisdiction upon the Court of Chancery.”  Clause (ii) of this definition includes claims concerning the application, interpretation, enforcement or validity of the governing documents of a corporation, documents restricting the transfer of a corporation’s securities, merger agreements, or certain proxies, as well as claims concerning the interpretation, application or enforcement of the DGCL.

                    i. Fee-shifting.

The Amendments add a new Section 102(f) to the DGCL that prohibits the inclusion in a corporation’s certificate of incorporation of “any provision that would impose liability on a stockholder for the attorneys’ fees or expenses of the corporation or any other party in connection with an internal corporate claim.” The Amendments also revise Section 109(b) of the DGCL to include an analogous clause prohibiting any such provision in the bylaws of a corporation. These prohibitions apply solely to stock corporations and do not affect non-stock corporations.

                    ii. Forum selection.

The Amendments also add a new Section 115 to the DGCL that both expressly authorizes but also places limits on forum selection provisions. Specifically, the new Section 115 allows corporations to require that “any or all internal corporate claims shall be brought solely and exclusively in any or all of the courts in [Delaware],” but also provides that “no provision of the certificate of incorporation or the bylaws may prohibit bringing such claims in the courts of [Delaware].”  This term effectively prohibits Delaware corporations from making any other jurisdiction the exclusive forum for internal corporate claims.

3.         Effects of the legislation.

The legislation has important effects on the ability of a Delaware corporation to adopt fee-shifting and exclusive forum provisions in its governing documents.  While generally restricting the former and authorizing the latter, the precise scope of the Amendments should be carefully considered when evaluating their effect on Delaware law.

First, the Amendments appear to put to rest the question of whether a Delaware corporation (other than a non-stock corporation) can adopt fee-shifting provisions in its governing documents.  However, the statutory prohibition on fee-shifting provisions only applies to provisions that would impose liability on a stockholder for fees and expenses arising out of internal corporate claims.  Consequently, while a corporation could not use its governing documents to shift attorneys’ fees incurred in litigation alleging internal corporate claims, the ability of a corporation to adopt fee-shifting provisions with regard to other claims, such as those arising under federal securities law, remains an open question under Delaware law.[1]

Second, the Amendments authorize a Delaware corporation to adopt exclusive forum provisions in its governing documents, but they prohibit the provisions from restricting internal corporate claims from being brought in the Delaware courts.  This legislative limitation appears to supersede the Court of Chancery’s decision in City of Providence v. First Citizens BancShares, Inc., 99 A.3d 229 (Del. Ch. 2014), which upheld as facially valid the bylaw provision of a Delaware corporation that selected North Carolina, its principal place of business, as the exclusive forum.  Such restrictions on bringing internal corporate claims in Delaware contained in previously enacted exclusive forum provisions will likely be held unenforceable under the Amendments.

In light of this change in Delaware law, corporations that believe a forum other than Delaware is the appropriate location for resolving internal corporate claims must decide whether preserving the possibility of litigating in their preferred forum makes sense in light of the potential costs of multi-jurisdictional litigation.  The Amendments, however, do not appear to require corporations to choose between selecting Delaware as an exclusive forum and adopting no forum limitations at all.  The Amendments do not expressly prohibit corporations from limiting internal corporate litigation to two or more forums, so long as one of them is Delaware.  In addition, corporations which adopted exclusive forum provisions prior to the adoption of the Amendments should review the types of claims covered by such provisions to determine whether they include types of claims other than, or exclude types of, internal corporate claims.

Several questions about forum selection provisions remain in the wake of the Amendments.  For example, the Amendments do not address the validity of clauses, which have been included in some forum selection provisions, stating that stockholders consent to personal jurisdiction in the corporation’s designated forum if they file suit elsewhere.  Nor do the Amendments clarify how exclusive forum provisions will be applied in cases in which a stockholder brings internal corporate claims and other types of claims in the same action.

4.         Conclusion.

The Amendments continue the discussion concerning what actions a corporation may take to mitigate the costs of stockholder litigation.  While codifying the state of the law on fee-shifting and exclusive forum provisions, they leave open some significant questions in this area as discussed in Section 3 above.  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.  Similarly, corporations that adopted exclusive forum provisions prior to the Amendments should review such provisions to make sure that they are consistent with the new DGCL Section 115.

   [1]   Whether fee-shifting provisions are enforceable with respect to federal securities law claims remains an open question under federal law.  Further, the staff of the Securities and Exchange Commission has made statements indicating that they are scrutinizing the propriety of fee shifting provisions that extend to federal securities claims.

Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these issues.  Please contact the Gibson Dunn lawyer with whom you usually work, or any of the following:

Elizabeth Ising – Washington, D.C. (202-955-8287, [email protected])
Ronald O. Mueller – Washington, D.C. (202-955-8671, [email protected])
Eduardo Gallardo – New York (212-351-3847, [email protected])
Robert B. Little  – Dallas (214-698-3260, [email protected])
Jason J. Mendro – Washington, D.C. (202-887-3726, [email protected])
Brian M. Lutz – San Francisco (415-393-8379 , [email protected])
Gillian McPhee – Washington, D.C. (202-955-8201, [email protected])
Chris Babcock  – Dallas (214-698-3138, [email protected])
Adam J. Brunk – New York (212-351-3980, [email protected])

Please also feel free to contact any of the following practice group leaders: 

Securities Regulation and Corporate Governance Group:
James J. Moloney – Orange County, CA (949-451-4343, [email protected])
Elizabeth Ising – Washington, D.C. (202-955-8287, [email protected]

Securities Litigation Group:
Meryl L. Young – Orange County (949-451-4229, [email protected])
Jonathan C. Dickey – Palo Alto/New York (650-849-5370/212-351-2399, [email protected])
Robert F. Serio – New York (212-351-3917, [email protected])
Thad A. Davis – San Francisco (415-393-8251, [email protected])

Mergers and Acquisitions Group:
Barbara L. Becker – New York (212-351-4062, [email protected])
Jeffrey A. Chapman – Dallas (214-698-3120, [email protected])
Stephen I. Glover – Washington, D.C. (202-955-8593, [email protected])

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