On Wednesday, the Governor Jack Markell signed into law a controversial bill that prohibits public companies from adopting provisions in shareholder agreements that would shift legal fees in shareholder litigation to the losing party in Delaware. This prohibition upset a number of corporations and at least one advocacy group tied to the U.S. Chamber of Commerce.
The controversial bill was signed exactly two weeks after the proposed legislation sailed through the Delaware's First State’s House of Representatives and just a little over a month after the Senate voted to pass it. The bill amends Delaware General Corporation Law to include a ban on fee-shifting or “loser pays” bylaws related to shareholder litigation.
The governor's office released a statement that the new law "preserves the balance between shareholders and management and ensures that shareholders in Delaware corporations continue to have access to the Delaware Court of Chancery."
The now official ban has caused quarreling between shareholders and corporations, with shareholders believing that fee-shifting tramples their rights and chills meritorious suits, while corporations and other advocates have argued that such provisions protect companies from increasingly aggressive and litigious investors.
The U.S. Chamber of Commerce’s Institute for Legal Reform made public its dissatisfaction with the governor’s decision in a statement released yesterday which said “We are disappointed that Delaware chose not to enact measure to deter abusive merger and acquisition lawsuits while prohibiting an important useful tool for combating these unjustified lawsuits.”
The issue of fee-shifting bylaws came front and center about a year ago, after the Delaware Supreme Court in ATP Tour v. Deutscher Tennis Bund held that fee-shifting provisions adopted by nonstock corporations "can be valid and enforceable” under state law. That decision left open the question of whether stock corporations could impose similar conditions, and Delaware lawmakers pushed for a ban on such clauses but ultimately held off because of backlash from corporate interest groups.
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