Amendments to DGCL Sections 204 and 205: Another Example of How Delaware Does Corporate Law Best

When assessing the factors that make Delaware the favored state for incorporation, the judiciary often overshadows the legislature. Delaware’s legislature is, however, widely recognized for creating necessary flexibility and stability in corporate law. In a blog essay written for the Delaware Journal of Corporate Law, DJCL Editor-in-Chief Jacob Fedechko argues that the recent amendments to DGCL Sections 204 and 205 show how the legislature helps to create such stability.

Read more at http://www.djcl.org/blog.

Proposed Financial Firm Tax

In a blog essay written for the Delaware Journal of Corporate Law, former DJCL staff member Brian King analyzes President Obama’s recent proposal for tax increases on financial institutions, and compares it to Rep. Dave Camp’s proposed tax, and the president’s 2010 proposed tax increase aimed at these firms. Mr. King explores the proposals in detail, and explains why each is as misguided and unlikely to succeed as the others.

Read more at http://www.djcl.org/blog.

Proposed Forum Selection Amendment Reinforces Boilermakers, Spells Waterworks for City of Providence and, As Always, Delaware Prevails

In a blog essay written for the Delaware Journal of Corporate Law, Kyle Wu discusses the proposed amendments to the DGCL regarding the forum selection clauses contained within certificates of incorporation and bylaws. He argues the changes will ultimately reinforce what is already the status quo since many foreign jurisdictions already respect and enforce the ruling in Boilermakers.

Read more at http://www.djcl.org/blog.

Direct Mktg. Ass’n v. Brohl: A Temporary Win for On-Line Retailers

In a blog essay written for the Delaware Journal of Corporate Law, Adam Young discusses the Tax Injunction Act’s applicability to notice and reporting requirements for out-of-state retailers. He argues that that the Supreme Court decision announced in Direct Mktg. Ass’n v. Brohl serves as a notice to out-of-state retailers that their days of tax advantages over in-state retailers may be coming to an end.

Read more at http://www.djcl.org/blog.

 

Fee-Shifting Bylaws: A Study in Federalism

Lawrence A. Hamermesh and Norman M. Monhait(fn1)

An exchange last month in the Bank & Corporate Governance Law Reporter among Neil Cohen, Jack Coffee and Jay Brown(fn2) addressed the possibility that corporate bylaws might regulate the award of attorney’s fees in federal securities class actions. The Delaware Supreme Court’s 2014 opinion in ATP(fn3) sparked renewed interest in this possibility, and when the Delaware State Bar Association’s Corporation Law Section proposed legislation limiting the use of charter and bylaw provisions to shift litigation expenses, it was noted (correctly) that the proposed legislation did not apply to federal securities claims.(fn4) From this premise, it has been suggested (incorrectly, we say) that bylaws providing for fee-shifting in federal securities class actions were implicitly endorsed, or at least remained viable as a matter of Delaware law.(fn5)

We are responding to the foregoing suggestion to make two points: first, the now enacted Delaware legislation (“SB 75,” which includes amendments to Sections 102 and 109 and the Delaware General Corporation Law (DGCL), and the addition of Section 115 to that statute(fn6)) does not affect the question of the validity of bylaws providing for fee-shifting in federal securities class actions; and second, in our view the DGCL did not and after passage of SB 75 does not authorize such bylaws.

We begin with a point on which Professors Coffee and Brown appear to agree: namely, that SB 75 does not apply to federal securities class action litigation. By its terms, the legislation only applies to bylaws that provide for fee-shifting in connection with “internal corporate claims.” New Section 115 defines that term 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 this title confers jurisdiction upon the Court of Chancery.” If federal securities claims are covered by this term, they must fall within at least one of the two definitional clauses. It’s easy to see that clause (ii) does not cover federal securities claims, because the DGCL does not “confer[] jurisdiction upon the Court of Chancery” to hear such claims.

Nor do federal securities claims typically fall within clause (i) of the definition of “internal corporate claims.” The predominant form of federal securities class action litigation is based on Section 10(b) of the Securities Exchange Act of 1934(fn7) and SEC Rule 10b-5(fn8), and most commonly involves allegations that a material misstatement or omission induced class members to purchase securities before the misstatement or omission was corrected. In that situation, the fraud is visited upon investors, but not stockholders as such: it should be irrelevant whether a class member was or was not already a stockholder at the time of the alleged fraud. As Vice Chancellor Laster recently concluded in the Activision litigation: “A Rule 10b-5 claim under the federal securities laws is a personal claim akin to a tort claim for fraud. The right to bring a Rule 10b-5 claim is not a property right associated with shares, nor can it be invoked by those who simply hold shares of stock.”(fn9)

Accordingly, any duty breached under Rule 10b-5 (or under Sections 11 or 12 of the Securities Act of 1933(fn10)) does not arise from a director or officer’s duty to the corporation or its stockholders, and a Rule 10b-5 claim should not be considered an “internal corporate claim” within the meaning of new Section 115. Of course, if a director’s or officer’s violation of Rule 10b-5 were understood to involve a violation of his or her duty as a director or officer, then the amendments to DGCL Sections 102 and 109 would prohibit a bylaw providing for fee-shifting in connection with litigation of Rule 10b-5 claims. But like Professors Brown and Coffee, we think that a better reading of these amendments would regard them as limited to the Delaware “lane,” namely to breaches of duty arising under the DGCL and Delaware corporate decisional law. Therefore, we believe that the recent amendments to the DGCL do not address the validity of a bylaw purporting to shift fees in federal securities class action litigation.

So where does that leave such bylaws in terms of validity under Delaware law? In our view, their validity remains exactly as it was before the legislation was enacted. There is nothing to suggest any intention to endorse or accomplish, by negative implication, a validation of bylaws (or charter provisions, for that matter) purporting to regulate litigation arising under any body of law (tort, contract, federal securities law) other than Delaware corporation law.

Instead, the efficacy of a fee-shifting charter or bylaw provision purporting to affect federal securities class actions must be determined under Delaware case law interpreting the scope of DGCL Sections 102(b)(1) and 109(b) – most notably, the opinions in ATP and FedEx/Chevron (fn11)(by then Chancellor Strine). And as we read those opinions, Sections 102(b)(1) and 109(b) cannot be read, despite their breadth and the presumptive validity of provisions adopted pursuant to them, to authorize provisions regulating litigation under the federal securities laws.

Both ATP and FedEx/Chevron are instructive in this regard. Starting with the latter (but earlier) opinion, we see that what the court was endorsing was a bylaw that it considered to affect forum selection for “the kind of claims most central to the relationship between those who manage the corporation and the corporation’s stockholders” – namely, “suits brought by stockholders as stockholders in cases governed by the internal affairs doctrine.”(fn12) In contrast, the court went out of its way to distinguish a bylaw regulating “external” matters, such as “a bylaw that purported to bind a plaintiff, even a stockholder plaintiff, who sought to bring a tort claim against the company based on a personal injury she suffered that occurred on the company’s premises or a contract claim based on a commercial contract with the corporation.”(fn13) A bylaw regulating selection of a forum to litigate such external claims “would be beyond the statutory language of 8 Del. C. 109(b)” for the “obvious” reason that it “would not deal with the rights and powers of the plaintiff-stockholder as a stockholder.” (emphasis in original). As previously noted, a bylaw purporting to regulate the litigation of claims under Rule 10b-5 “would not deal with the rights and powers of the plaintiff[] as a stockholder,”(fn14) and would therefore not be within even the broad scope of Section 109(b).

Nothing in ATP altered this analysis. Addressing the principal certified question in that case, the Court was necessarily focused on “suits brought by stockholders as stockholders in cases governed by the internal affairs doctrine.”(fn15) (emphasis added). In the underlying litigation, the plaintiffs alleged “Delaware fiduciary duty claims,” as well as antitrust claims.(fn16) There is no indication in the ATP opinion that the Supreme Court questioned former Chancellor Strine’s view that the “flexible contract” formed by the statute, charter, and bylaws could not extend to any litigation other than “suits brought by stockholders as stockholders in cases governed by the internal affairs doctrine.” Indeed, if the underlying litigation had involved only antitrust claims, we have no doubt that the Court would have concluded (consistent with FedEx/Chevron) that the bylaw could not have provided for fee-shifting in relation to the claims presented. And having been asked merely to opine about the overall facial validity of the bylaw, the Court had no occasion to parse the facts to determine whether the bylaw could require shifting fees that might have been solely attributable to the antitrust claims.

In sum, the “flexible contract” identified in ATP and established by the DGCL, the certificate of incorporation, and the bylaws encompasses a great deal – the subject matter scope of Sections 102(b)(1) and 109(b) is broad. But it is not limitless, as FedEx/Chevron expressly teaches. And in our view, it does not extend so far as to permit the charter or the bylaws to create a power to bind stockholders in regard to fee-shifting in, or the venue for, federal securities class actions. In addition, we agreed with Professor Coffee’s forceful point that a state authorization of charter and bylaw provisions purporting to control fee-shifting and venue in federal securities class actions is likely to be held pre-empted, regardless of their validity or effect under state law.(fn17) Given our views of Delaware law, we saw no reason for a statutory amendment that purported to reach beyond the confines of internal governance litigation, and we supported drafting that, as Professor Brown rightly suggests, stayed within Delaware’s “lane.”

(1) Mr. Monhait is the immediate past chair, and Professor Hamermesh a prior chair and a member, of the Council of the Delaware State Bar Association’s Corporation Law Section. The views expressed here, however, are solely those of the authors, and do not necessarily represent the views of the Association, the Section, or its Council.
(2) J. Robert Brown, Jr., Staying in the Delaware Corporate Governance Lane: Fee Shifting Bylaws and a Legislative Reaffirmation of the Rules of the Road; John C. Coffee, Jr., What Happens Next?; Neil J. Cohen, What Is the Outlook for Fee-Shifting in Securities Fraud Litigation After Delaware Passes a Ban on These Provisions for “Internal Corporate Claims”?.
(3) 91 A.3d 554 (Del. 2014).
(4) John C. Coffee, Jr., Delaware Throws a Curveball, Mar. 16, 2015, available at http://clsbluesky.law.columbia.edu/2015/03/16/delaware-throws-a-curveball/ (“read literally, the new legislation would not preclude a board-adopted bylaw that shifted the corporation’s and other defendants’ expenses against a plaintiff who lost (or was less than substantially successful) in a federal securities class action (at least so long as the action did not allege a “violation of a duty” by any corporate officer or director).”).
(5) Id. (“the proposed legislation may protect “Delaware-style” litigation from the threat of fee-shifting, but not securities class actions.”).
(6) SB 75, available at http://legis.delaware.gov/LIS/lis148.nsf/vwLegislation/SB+75/$file/legis.html?open.
(7) 15 U.S.C. §78j(b).
(8) 17 C.F.R. §240,10b-5
(9) In re Activision Blizzard Inc. Stockholder Litigation, C.A. No. 8885-VCL (Del. Ch. May 21, 2015), slip op. at 50.
(10) 15 U.S.C. §§ 77k, 77l.
Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013).
(11) 73 A.3d at 952.
(12) Id.
(13) Id. In cases involving such external claims, the stockholders indirectly bear the costs of the litigation to the corporation, but FedEx/Chevron makes clear that this circumstance does not convert the matter into one within the internal affairs of the corporation and subject it to regulation by the charter or bylaws of the corporation.
(14) Id.
(15) 91 A.3d at 556.
(16) John C. Coffee, Jr., Federal Pre-Emption and Fee-Shifting, (Jan. 26, 2015), available at http://clsbluesky.law.columbia.edu/2015/01/26/federal-preemption-and-fee-shifting/.

Peeling Back the Business Judgment Rule: Corporate Responsibility After Chiquita

By Matthew Goeller
Articles Editor, Delaware Journal of Corporate Law

Enacted in the first Judiciary Act of 1798, the Alien Tort Statute (“ATS”) provides federal jurisdiction to aliens alleging violations of international law. What remained a largely unused statute, the ATS reemerged in 1980 as a creative tool to hold violators of international law liable in U.S. courts, even when those violations occurred abroad or the actors were foreign citizens. As ATS jurisprudence unfolded over the last thirty years, the statute’s jurisdictional grant extended first to foreign state actors, then to private citizens, and eventually even to corporations. The Supreme Court’s decision in Kiobel v. Royal Dutch Petroleum Co., however, seemed to narrow the scope to which the ATS applies to corporations. Despite the Supreme Court’s holding, many circuit courts and commentators maintained that ATS liability is nonetheless still possible for corporations.

In Cardona v. Chiquita, Colombian citizens brought suit against Chiquita under the ATS, claiming that Chiquita’s support of known terrorist groups funded a brutal campaign of torture, drug trafficking, and imprisonment. The Eleventh Circuit’s holding that the ATS does not reach corporations highlights the current uncertainty as to whether the statute applies to corporations.

Adding to this uncertainty is an emerging concern that participation in international law violations might perhaps implicate a breach of fiduciary duties. Corporate directors, whose business decisions directly or indirectly involve the corporation with violators of international law, might ordinarily seek the protection of the deferential business judgment rule. However, more nuanced interpretations of fiduciary duties and more probative efforts of understanding the precise nature of those business decisions might well evince a breach of fiduciary duty. This analysis, coupled with the already present uncertainty as to the applicability of the ATS, should encourage directors of corporations to adopt more stringent governance policies that provide structural mechanisms to ensure compliance with internationally recognized legal norms.

Download the full article Peeling Back the Business Judgment Rule – Corporate Responsibility After Chiquita.

Suggested Citation: Matthew B. Goeller, Peeling Back the Business Judgment Rule: Corporate Responsibility After Chiquita, INST. DEL. CORP. & BUS. L. (May 28, 2015), http://blogs.law.widener.edu/delcorp/#sthash.7Nk3jxjd.dpbs

Not Your Average Fee-Shifting Provision

Jennifer Buckley (Widener Delaware ’16) concludes her article on the fee-shifting controversy as follows:

The current effort to legislate away fee-shifting bylaws is to be applauded for attempting to combine strong protection of shareholder interests with an acknowledgement of corporate concerns in the legitimization of forum selection bylaws. If it passes, then those concerned about excessive litigation will no doubt develop another tool for deterring frivolous shareholder lawsuits. If it does not pass, then one way to generate broad support could be to adopt one or more of the moderate approaches described here. These proposals seek to balance the legitimate interests of plaintiff shareholders with those of the corporations in which they invest. Moving forward, any legislation that seeks to protect shareholders must keep in mind the business community’s concern over excessive litigation. Likewise, proponents of fee-shifting bylaws must be willing to agree to reasonable limitations that soften their negative impact on plaintiff shareholders, especially those without a ready market for their shares. As with most policy debates, the answer likely lies somewhere in the middle ground.

Ms. Buckley’s article can be reviewed at:

Buckley.Note.REVISED.052015

Miramar Police Officers’ Retirement Plan v. Murdoch: Not Bound By The Past

In a recent Court of Chancery case, Miramar Police Officers’ Retirement Plan v. Murdoch, Chancellor Bouchard held that a spinoff corporation was not bound by the settlement agreement entered into by the parent corporation. In a blog essay written for the Delaware Journal of Corporate Law, DJCL Manuscript Editor Justin Forcier examines the opinion and concludes that the Chancellor’s well-reasoned holding reflects the most principled outcome for the case.

Read more at www.djcl.org/blog.

Material or Not: Can Failure to Disclose Under S-K Item 303 Give Rise to a Fraud Class Action?

The Second and Ninth Circuit Courts of Appeals are directly opposed on a fine point of securities litigation: whether a failure to disclose a “known trend or uncertainty” under Item 303 of Regulation S-K can give rise to a fraud class action under Section 10(b) of the Securities and Exchange Act of 1934. In a blog essay written for the Delaware Journal of Corporate Law, DJCL staff editor Sabrina Hendershot discusses the circuit split and concludes that although no shareholders have been successful on this potential cause of action, issuers should take great care in deciding whether to disclose certain trends to the SEC to ensure compliance and avoid litigation.

Read more at www.djcl.org/blog.