The Future Direction of Delaware Law (Including a Brief Exegesis on Fee Shifting Bylaws)

Delaware sets the governance standards for most public companies. The ability to attract corporations could not be explained solely by the existence of a favorable statutory regime. Delaware was not invariably the first or the only state to implement management friendly provisions. Given the interpretive gaps in the statute and the critical importance of the common law in the governance process, courts played an outsized role in setting legal standards. The management friendly nature of the Delaware courts contributed significantly to the state’s attraction to public corporations. A current example of a management friendly trend in the case law had seen the recent decisions setting out the board’s authority to adopt bylaws under Section 109 of the Delaware General Corporation Law (DGCL), particularly those involving the shifting of fees in litigation against the corporation or its directors. The DGCL allows bylaws that address “the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees.” The broad parameters are, however, subject to limits. Bylaws cannot be inconsistent with the certificate of incorporation or “the law.” Law includes the common law. The Delaware courts have used the limitations imposed by “the law” to severely restrict the reach of shareholder inspired bylaws. The courts have not used the same principles to impose similar restraints on bylaws adopted by the board of directors. This can be seen with respect to bylaws that restrict or even eliminate the right of shareholders to bring actions against management and the corporation. In ATP Tour, Inc. v. Deutscher Tennis Bund the court approved a fee shifting bylaw that had littl relationship to the internal affairs of the corporation. The decision upheld the bylaw as facially valid.The decision ignored a number of obvious legal infirmities. Among other things, the decision did not adequately address the requirement in Section 109(b) that bylaws be consistent with “the law.” The decision obliquely acknowledged that the provisions would “by their nature, deter litigation” but otherwise made no effort to assess the impact of this deterrence on shareholders causes of action. The provision in fact had the practical effect of restricting, if not eliminating, litigation rights granted by the DGCL and the common law. Perhaps most significantly, however, the bylaws significantly limited common law rights of shareholders to bring actions against the corporation and the board. Given the high dismissal rates for these actions, fee shifting bylaws imposed a meaningful risk of liability on plaintiffs. Moreover, because judgments in derivative suits were paid to the corporation, shareholders serving as plaintiffs confronted the risk of liability without any offsetting direct benefit. By preventing suits in this area, the bylaw effectively insulated the behavior of boards from legal challenge. The ATP decision was poorly reasoned and overstepped acceptable boundaries. The management friendly decision threatened the preeminent role of Delaware in the development of corporate law. The decision raised the specter of federal intervention and the potential for meaningful competition from the states. Because the opinion examined the bylaw in the context of non-stock companies, the reasoning may remain applicable only to those entities and never make the leap to for-profit stock corporations. Nonetheless, the analysis reflects a management friendly approach that does not adequately take into account the impact of the provision on the rights of shareholders.

Staying in the Delaware Corporate Governance Lane: Fee Shifting Bylaws and a Legislative Reaffirmation of the Rules of the Road

The Delaware legislature has taken steps towards the adoption of amendments to the Delaware General Corporation Law (DGCL) that would prohibit fee shifting provisions in the articles and bylaws. The language in the legislative proposal, however, addresses fee shifting provisions only in the context of "internal corporate claims." Some have raised concerns that this language would allow for fee shifting provisions that applied to other types of actions, including at least some cases brought under the securities laws. This piece suggests that in fact the Delaware General Corporation Law already prohibits the adoption of bylaws and certificate provisions that apply to causes of action unrelated to internal corporate claims. As a result, there was no reason for the Delaware legislature to expressly bar fee shifting provisions in these types of actions.

Notes of proceedings and cases determined in the high court of errors and appeals, the court of chancery, and the orphans court of the state of Delaware, 1792-1832

Contains summaries of cases heard by the Delaware Supreme Court and the Delaware Appeals Court in the counties of Sussex, Kent, and Newcastle covering a variety of legal topics. Supposedly based on Wilson's Red Book.

Read's Delaware cases, 1793-1794

Contains legal cases transcribed by George Read containing accounts of cases before the Delaware Supreme Court.

Lawyer's case book containing notes of cases adjudged and determined in the courts of Delaware, 1793-1796

Lawyer's case book containing notes on cases before the Delaware Supreme Court and Delaware Court of Common Pleas. Contains information on the cases and judgements.

Susquehanna and Delaware Rivers headwaters, New York, 1790 (Raster Image)

This layer is a georeferenced raster image of the historic paper map entitled: Map of the head waters of the rivers Susquehanna & Delaware embracing the early patents on the south side of the Mohawk River : from the original, drawn about the year 1790, by Simeon DeWitt, Esq. ... ; with the date of each patent now appended from the rec. in surveyr. genls. office, by E.B. O'C. It was published by Weed, Parsons & Co. in 1849. Scale [ca. 1:260,000]. Covers portion of Central New York including Oneida, Herkimer, Montgomery, Schenectady, Schoharie, Otsego, Delaware, and Greene Counties. The image inside the map neatline is georeferenced to the surface of the earth and fit to the Universal Transverse Mercator (UTM) Zone 18N NAD83 projection. All map collar and inset information is also available as part of the raster image, including any inset maps, profiles, statistical tables, directories, text, illustrations, index maps, legends, or other information associated with the principal map. This is a cadastral map showing property boundaries, names of property owners, dates of patent, drainage, and more. Includes ill. This layer is part of a selection of digitally scanned and georeferenced historic maps from The Harvard Map Collection as part of the Imaging the Urban Environment project. Maps selected for this project represent major urban areas and cities of the world, at various time periods. These maps typically portray both natural and manmade features at a large scale. The selection represents a range of regions, originators, ground condition dates, scales, and purposes.