Source: https://www.bna.com/delaware-courts-leave-n17179891876/
Timestamp: 2019-04-22 08:27:25+00:00

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The Delaware Supreme Court's opinion in ATP Tour Inc. v. Deutscher Tennis Bund spurred not only the Delaware General Assembly to consider a ban of fee-shifting bylaws, but also attracted more attention to the idea of requiring shareholders to pay fees when their lawsuits are unsuccessful.
The opinion by Justice Caroline Berger already has corporate attorneys thinking of creative ways to set up similar bylaws that might survive judicial scrutiny or legislative action.
Responding to a certified question, the Delaware Supreme Court ruled May 8 that the shifting provisions in the bylaws of Delaware nonstock corporations can be valid and enforceable (ATP Tour Inc. v. Deutscher Tennis Bund, 2014 BL 129345, Del., No. 534, 2013, 5/8/14).
The opinion said it was not per se improper to adopt a fee-shifting bylaw to minimize litigation, said Richard P. Rollo, a director and corporate litigator at Richards, Layton & Finger P.A., Wilmington, Del., and co-author of Bloomberg BNA's Delaware Nonstock Corporations portfolio.
A company might consider adopting “an alternative to what is perceived as a draconian cost shift to the shareholder,” he said. For instance, the shareholder could receive the option of either accepting the fee-shifting bylaw, as is, or agreeing to reduced discovery, he said.
“You give them an out,” he said.
The justification of, say, the reduced discovery would be to minimize the cost of litigation, which could benefit the stockholders and corporation, he said.
“Now, you can see a business justification,” he said.
Delaware state Sen. Bryan Townsend (D-Newark) sponsored a bill that would prohibit Delaware companies from adopting such fee-shifting bylaws, which are designed to make shareholders pay all fees if they file a lawsuit against the company and lose.
On June 24, Townsend said he would table his bill until at least January to allow lawmakers time to hear concerns from the U.S. Chamber of Commerce and other business interests.
Between now and the General Assembly's regular session next year, attorneys must inform their clients that Delaware lawmakers will be studying the issue further and that the legislature could invalidate any fee-shifting bylaws adopted, said John Mark Zeberkiewicz, a Richards Layton director and co-author of Bloomberg BNA's Delaware Nonstock Corporations portfolio who focuses his practice on transactional matters involving Delaware corporations.
Given the language of Townsend's bill, which borrows largely from one drafted by the corporation law section of the Delaware State Bar Association, attorneys have good reason to believe the bylaw “may not be permitted,” Zeberkiewicz said.
Companies could attempt to add language to mitigate “the harsh impact of an ATP-style bylaw,” such as saying fees shall be shifted except as the court may otherwise determine in its discretion for good cause, he said.
“I think we are going to see these in bylaws notwithstanding the fact of the fairly good likelihood that we are going to see legislation addressing the issue,” Zeberkiewicz said.
The unrelated In re Orchard Enterprises case sheds more light on when the Delaware Court of Chancery will apply the “entire fairness” standard of review to a going-private transaction involving a controlling shareholder (In re Orchard Enters., Inc. Stockholder Litig., 2014 BL 56381, Del. Ch., C.A. No. 7840-VCL, 2/28/14).
In the opinion, Vice Chancellor J. Travis Laster held that the transaction would be subject to review under entire fairness rather than the business judgment rule, distinguishing the Delaware Supreme Court's decision in Kahn v. M&F Worldwide Corp.
Laster's discussion of when the controlling shareholder must agree to certain conditions and his comparison in the instant case of the fair value determination under the appraisal and the deal price are interesting, said Gregory Varallo, director and executive vice president of Richards Layton.
With the Orchard transaction, the appraisal price turned out to be twice that of the deal price.
To avoid entire fairness review, a controlling shareholder must agree “up front, before any negotiations begin” that the transaction will be subject to the affirmative recommendation of a special committee composed of independent and disinterested directors that is empowered to freely select its own advisors and to say “no” to the deal, Laster ruled.
Also, the controller must agree before negotiations begin that the transaction will be subject to the affirmative vote of an informed majority of stockholders unaffiliated with the controller, Laster continued.
If none or only one of the protections is agreed to up front, the transaction will be subject to entire fairness review. If the controlling stockholder can show that at least one of the protections was in place, however, the controlling stockholder can shift the burden of proof to the plaintiffs to show that the transaction was unfair.
If the controlling stockholder is unable to shift the burden of proof, the controlling stockholder will bear the burden at trial of proving that the transaction was the product of a fair process and that the price paid was fair.
A final order and judgment approving a settlement in the Orchard case was entered June 30.
In one of its last opinions of the second quarter, the Delaware Court of Chancery took up the issue of attorneys' fee awards related to claims litigated under the state's Misuse of Computer System Information Act (Wayman Fire Prot. Inc. v. Premium Fire & Sec. LLC, 2014 BL 180174, Del. Ch., C.A. No. 7866-VCP, 6/27/14).
The court pointed out that the statutory breach was only one of several claims made and the award of fees was virtually the only recovery in the case.
The proposed order requested an award for $17,300 for nominal damages, $69,716.25 for unjust enrichment, and attorneys' fees and costs of $374,128.12. The court reduced the award of attorneys' fees and costs to $200,000.
Delaware Law Raul v. Astoria Fin. Corp., 2014 BL 173740, Del. Ch., C.A. No. 9169-VCG, 6/20/14 (see related story, page 753) A mere “volunteer” shareholder who points out how his or her corporation could benefit from some action is not thereby entitled to attorneys' fees paid by the company, according to the Delaware Court of Chancery.
Arbitration SPX Corp. v. Garda USA Inc., 2014 BL 166597, Del., No. 332, 2013, 6/16/14 (12 CARE 675, 6/20/14) An accounting firm serving as arbitrator in a dispute about a stock purchase agreement didn't manifestly disregard the law when it interpreted the contract in the seller's favor, according to the Delaware Supreme Court.
Delaware Law In re El Paso Pipeline Partners LP Derivative Litig., 2014 BL 163627, Del. Ch., C.A. No. 7141-VCL, 6/12/14 (12 CARE 673, 6/20/14) The parties to a limited partnership agreement that explicitly eliminated fiduciary duties left no room for the court to fill in gaps with the implied covenant to act in good faith and deal fairly, the Delaware Court of Chancery ruled.
Corporate Governance Biolase Inc. v. Oracle Partners LP, 2014 BL 165101, Del., No. 270, 2014, 6/12/14 (12 CARE 675, 6/20/14) The Delaware Supreme Court concluded that corporate directors do not have to give written notice of their resignation from the company's board.
Delaware Law ATP Tour Inc. v. Deutscher Tennis Bund, 2014 BL 129345, Del., No. 534, 2013, 5/8/14 (12 CARE 529, 5/16/14) The Delaware Supreme Court responded to four certified questions regarding fee-shifting provisions in Delaware non-stock corporations, and held that a fee-shifting bylaw is not per se invalid and the fact that it was adopted after the entities became members does not affect its enforceability.

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