Fee Shifting Bylaws and the Reaction of Institutional Investors (Part 2)

We are discussing letters written by a number of institutional investors to proxy advisory firms and policymakers in Delaware. Copies of the letters can be found here.

With respect to Delaware policymakers, the letters sought to raise concerns over those arguing that the bylaws benefited investors.   

  • While lobbyists hired by corporate interests are trying to portray these bylaws as protecting shareholders, the exact opposite is true. These bylaws effectively make corporate directors and officers unaccountable for serious wrongdoing. The General Assembly must act promptly to restore confidence in Delaware’s credibility in developing a balanced corporate law, preserve stockholders’ access to the court system, and make clear that directors and officers cannot insulate themselves from accountability under the guise of unilateral bylaw or charter provisions.

Investors could speak for investors.  Id.  ("We must make clear that these lobbyists do not speak for the interests of the nation’s public investors.").  

And, in fact, the investors sending in the letters opposed the bylaws.   

  • Far from protecting corporations from “frivolous litigation,” these fee-shifting provisions effectively bar any judicial oversight of misconduct of corporate directors. They undermine the most fundamental premise of the corporate form – that stockholders, simply by virtue of their investment, cannot be responsible for corporate debts.

Investors objected because the bylaws "essentially remove[d] judicial oversight over corporate wrongdoing by effectively foreclosing stockholders' access to courts" by preventing "meritorious stockholder claims" and "render[ing] illusory the fiduciary obligations of corporate directors."  As the letters asserted: 

  • such provisions bar all judicial oversight by making it economically unfeasible for stockholders to seek redress in Delaware courts to protect their rights. Without adequate protections and reasonable access to the courts to hold corporate fiduciaries accountable when they violate their obligations to stockholders, investor confidence diminishes and market participation suffers, hurting investors and the businesses in which they invest. 

The letters posed a number of consequences likely to result from the continued use of the bylaws.  Investment in Delaware corporations could decline.  Id. ("Allowing directors to impose personal liability on stockholders through bylaw amendments would make continued investment in Delaware corporations untenable."). Mostly, though, the letters posed a theat to Delaware.   

Their use could "directly and materially impair the Delaware economy."  Likewise, they threatened the preeminent role of Delaware with respect to the development of corporate law.   

  • Delaware has a substantial interest in the development of its corporate law, and the inevitable widespread adoption of fee-shifting bylaws will impair the development of that law. For more than one hundred years, the Delaware judiciary has provided a fair forum for the resolution of intra-corporate disputes. The Delaware Court of Chancery is generally considered the nation’s “pre-eminent” business court, and virtually every state in the country looks to Delaware law in the development of its own corporate law. If Delaware corporations adopt fee-shifting bylaws, however, the Delaware judiciary will be relegated to the sidelines and a major justification for investing in Delaware corporations will disappear.

The letters raise shareholder concerns with respect to these bylaws.  They make it far more difficult for proponents of the bylaws to assert that they are beneficial to shareholders.  

J Robert Brown Jr.