Update: Proposal to Reverse Delaware Fee-Shifting Decision

payment-due-no

A legislative proposal’s been made in response to the Delaware Supreme Court’s recent decision that Delaware corporations have the ability to modify their corporate bylaws to provide that shareholders who sue them, and lose, have to pay the company’s defense costs (commonly referred to as “fee-shifting”), which I recently blogged about.

On May 29th, Delaware’s State Bar Association agreed to support legislation to effectively overturn the state Supreme Court decision, which found fee-shifting bylaws permissible under Delaware law. The proposed legislation would amend the Delaware General Corporation Law (DGCL) to prevent firms from imposing fee-shifting provisions or other monetary liabilities on stockholders through corporate charters or bylaws.

Proposed Changes

Specifically the Delaware Bar proposed a new section (§ 331) would be added to the Delaware code, specifically preventing liability from being imposed on corporate shareholders — unless otherwise permitted by the DGCL.

§ 331. Monetary liability of stockholders.

Notwithstanding any other provision of this chapter, neither the certificate of incorporation nor the bylaws of any corporation may impose monetary liability, or responsibility for any debts of the corporation, on any stockholder of the corporation, except to the extent permitted by Sections 102(b)(6) and 202 of this title.

Meanwhile, § 102(b)(6), which deals with what might be included in an organization’s certificate of incorporation, would be amended by adding the words in red as follows:

A provision imposing personal liability for the debts of the corporation on its stockholders based solely on their stock ownership, to a specified extent and upon specified conditions; otherwise, the stockholders of a corporation shall not be personally liable for the payment of the corporation’s debts except as they may be liable by reason of their own conduct or acts.

Intent and Outcome, if Passed

Perhaps importantly, the proposed new rule does not actually prohibit bylaw provisions that impose personal liability on stockholders with their explicit affirmative consent—which would seem to mean that where the shareholders provide explicit affirmative consent, fee-shifting would still be permissible.

This might mean that fee-shifting provisions would be permissible if included in new stock sales (such as in initial or secondary public offerings) if the purchase of the shares with embedded fee-shifting provisions in the company charter or bylaws was deemed to be explicit consent.

Passage of the proposed legislation is far from certain. The proposal may be presented to the Delaware General Assembly for passage before the end of the current legislative session on June 30, with an intended effective date of August 1, 2014.

Stay tuned to see how this finally plays out in Delaware.

About Ann Longmore

Ann is Executive Vice President of Willis' Executive Risks practice. Based in New York, she has been with the compa…
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