Delaware's Top Five Worst Shareholder Decisions for 2014 (#3: ATP Tour v. Deutscher and the Rewriting of the DGCL)
Perhaps more than any other decision by the Delaware Supreme Court in 2014, the one in ATP is the most problematic and concerning. In 2013, the Chancery Court in Chevron upheld bylaws adopted unilaterally by the board that required shareholders to bring actions in a specified forum, typically Delaware. The decision ensured that Delaware would be the decision maker in fiduciary duty cases. The case for the most part was based upon an unprecedented and expansive reading of the board's authority to adopt bylaws under DGCL 109.
Nonetheless, the case at least purported to retain a nexus with the internal affairs doctrine. The bylaws in that case were said to have involved "litigation relating to Chevron‟s internal affairs" and required that such litgation "be conducted in Delaware". While the analysis expanded the reach of management adopted bylaws, they were at least ostensibly limited by the need to relate to a corporation's internal affairs.
That limitation was entirely read out of Section 109 by the ATP decision. In that case, the Court upheld as facially valid a fee shifting bylaw that applied in all actions against the entity or its owners. In the context of for profit companies, therefore, the provision applies not only to actions involving a company's internal affairs but also to actions under federal law such as the federal securities laws. The only facial limitation on bylaws in the aftermath of ATP is that it relate to the "business of the corporation," which means it can address almost any issue, irrespective of the connection to a corporation's internal affairs.
The case also ignored a statutory framework inconsistent with the court's interpretation. Section 102 of the DGCL provides that limits on shareholders should appear in the articles. As the provision provides:
- Any provision for the management of the business and for the conduct of the affairs of the corporation, and any provision creating, defining, limiting and regulating the powers of the corporation, the directors, and the stockholders, or any class of the stockholders, or the governing body, members, or any class or group of members of a nonstock corporation; if such provisions are not contrary to the laws of this State. Any provision which is required or permitted by any section of this chapter to be stated in the bylaws may instead be stated in the certificate of incorporation
Yet limits can now be included in the bylaws, largely writing this provision out of the Delaware Code.
This represents a significant rewriting of corporate law. It accedes considerable additional authority to management with respect to unilaterally adopted bylaws. For example, Section 109 specifically provides that bylaws can regulate the rights of employees. Under the reasoning in ATP, there is nothing that would facially invalidate a bylaw that shifted fees in suits brought by employees against the corporation. Bylaws were never intended to reach this type of behavior. Now they can.
In the short term, this newly granted authority is likely to result in greater efforts by companies to adopt bylaws that restrict the rights of shareholders.
In the longer term, the result is likely to continue the erosion of the role of Delaware in determining corporate law. By allowing bylaws unrelated to a corporation's internal affairs, the courts have put in place a true mechanism for competition among the states. Oklahoma already put in place a provision that requires fee shifting in derivative cases and has applied it to both domestic and foreign companies. Other states may follow suit. At the same time, the approach cements the courts as management friendly and encourages shareholders and investors to seek reforms in other forums, particularly at the federal level (increasing the likelihood of further federal preemption).
For a more detailed review of the misguided analysis in ATP, see Shifting Back the Focus: Fee Shifting Bylaws and a Need to Return to Legislative Intent.