Fee Shifting Bylaws and Senator Blumenthal

Senator Blumenthal sent a letter to the Chair of the SEC, Mary Jo White, calling on the SEC to take steps with respect to the implementation of fee-shifting bylaws. The letter described a number of negative ramifications that could arise from the bylaws. 

  • The potential ramifications from this decision are immense. No rational investor, even with significant financial interests at stake and when presented with clear evidence of corporate misconduct, will brave litigation when the corporate defendant can force the investor to face financial ruin unless he substantially wins on every point. While ATP Tour only affects corporations headquartered in Delaware, Delaware is home to many of the country’s largest public companies. Further, the Delaware Supreme Court’s action is already beginning to have a ripple effect in other jurisdictions, leading other state courts to reconsider longstanding doctrine in this area. 

The letter likewise called on the SEC to act.     

  • I call upon the Commission to commence investigation of Alibaba Group Holding, Ltd., one of several companies that have elected to include fee-shifting provisions in their governing documents but failed to disclose it in offering statements. The SEC should label such provisions as major risk factors and require corporations to publicly disclose them before any initial public offering. More broadly, the SEC should clarify that fee-shifting provisions are inconsistent with federal securities law. At a minimum, I urge the SEC to refuse to permit registration statements to move forward for any company that includes these provisions in violation of our federal securities laws.

The letter seeks to pressure the SEC to take steps to minimize the impact of these bylaws. Even if the SEC takes the steps suggested by Senator Blumenthal, the bylaws may still proliferate, albeit in a more limited manner (applicable, for example, only to derivative suits).  

A permanent solution could come from Delaware, with the courts or the legislature rejecting the applicability of the bylaws to for profit companies. To the extent that this does not occur, the issue will likely represent a candidate for federal preemption.    

J Robert Brown Jr.