Ex Post Facto Fee-Shifting Law?

In a recent blog post about legislative proposals relating to charter and bylaw fee-shifting provisions, Francis Pileggi writes:

Unlike routine amendments to the DGCL, this proposed legislation confronts powerful lobbyists on both sides of the issue. Thus, this proposal may be more akin to typical legislation in which the final version of the bill that is passed is not always similar to the first version of the bill that was introduced. The only certainty about this proposed bill, is that it will generate an enormous amount of commentary and discussion. I would not expect a final outcome until the last day of the session on June 30.

If some legislation is passed that ultimately limits the ability of a corporation to adopt fee-shifting bylaws, an interesting issue will be the impact, if any, that the legislation will have on those companies that already adopted fee-shifting provisions. Generally, there is a prohibition against ex post facto laws. Stay tuned.

Francis is right that statutes generally are not interpreted to apply retroactively. But in this case, there are two circumstances that suggest that charter or bylaw fee-shifting provisions that have been adopted by Delaware stock corporations would not survive enactment of the proposed legislation.

The first circumstance is Section 394 of the Delaware General Corporation Law , which provides that “all amendments [of the DGCL] shall be a part of the charter or certificate of incorporation of every corporation except so far as the same are inapplicable and inappropriate to the objects of the corporation.” As interpreted by the Delaware courts, this statute establishes that amendments to the DGCL apply to existing corporations. There may be a legitimate argument about whether a fee-shifting provision currently in place would be enforced in litigation initiated before the proposed statutory prohibition becomes effective (if it does), but given Section 394 there’s nothing ex post facto about prohibiting the operation and application of a fee-shifting provision with respect to litigation initiated after that effective date.

Nor is there anything unfair about the operation of Section 394 in the situation at hand. Last June, the Delaware General Assembly made it clear in Senate Joint Resolution 12 that “a proliferation of broad fee-shifting bylaws for stock corporations will upset the careful balance that the State has strived to maintain between the interests of directors, officers, and controlling stockholders, and the interests of other stockholders.” In the same resolution, the General Assembly called upon the Delaware State Bar Association to consider formulating legislative proposals on this and other litigation-related subjects. Many law firm publications on the subject warned corporations to proceed with caution given the possibility of legislation. No one can fairly claim surprise that a proposal has now emerged that would prohibit fee-shifting in stock corporations by charter or bylaw provision.

In short, Delaware stock corporations that adopted fee-shifting provisions after the ATP decision came down last spring would be well advised to consider removing them if and when it appears that the proposed legislation will be enacted.

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