Law Review Articles, the Delaware Courts, and Some "Guidance" on Bylaws (Part 2)
We are discussing the article written by Justice Ridgely from the Delaware Supreme Court. See The Emerging Role of Bylaws in Corporate Governance. The article examines bylaws, including forum selection, fee shifting, and mandatory arbitration bylaws.
With respect to forum selection bylaws, the articles was very positive. It noted the growing popularity of these bylaws (citing one source that found "at least another 112 Delaware corporations adopted or announced plans to adopt exclusive forum bylaws"). The article also noted their widespread acceptance outside of Delaware. See id. ("Jurisdictions in addition to Delaware have recognized the validity of a Delaware corporation’s forum-selection bylaw. As of this point, courts in California, Illinois, Louisiana, New York, Texas, and Ohio have upheld forum-selection bylaws adopted by Delaware corporations.").
The article did not mention the two cases that have declined to apply the bylaws. See Roberts v. Triquint Semiconductor, Inc., Circuit Court of Oregon, Aug. 14, 2014 & Galaviz v. Berg, US D. Ct., ND CA, Jan. 3, 2011.
With respect to fee shifting bylaws, the article was much more negative, raising all kinds of concerns. There was the problem of enforceability.
- Even though the Court found that a fee-shifting bylaw is not per se prohibited under Delaware law, this does not mean that a fee-shifting bylaw will be enforced. Rather, the enforceability of a bylaw in a court of equity "depends on the manner in which it was adopted and the circumstances under which it was invoked. Bylaws that may otherwise be facially valid will not be enforced if adopted or used for an inequitable purpose. Thus, “the enforceability of a facially valid bylaw may turn on the circumstances surrounding its adoption and use. For example, in Schnell v. Chris–Craft Industries, the Delaware Supreme Court refused to enforce a board-adopted bylaw that sought to reschedule the annual stockholder meeting for a month earlier. The Court held that the board’s intention in moving the meeting was to “perpetuat[e] itself in office” and "obstruct the legitimate efforts of dissident stockholders in the exercise of their rights to undertake a proxy contest against management.”
The article further suggested the reasoning in the ATP decision (the case upholding fee shifting bylaws) would not be extended to for profit companies.
Since the Court’s decision in ATP Tour, a number of commentators have assumed that it applies equally to for-profit, stock corporations. The Delaware Supreme Court did not say that in ATP Tour, so this remains an open question.
Finally, the article indicated that bylaws providing for the payment of fees only by shareholders were particularly suspect.
- Several companies have adopted one-way fee-shifting bylaws in the wake of ATP Tour despite the current uncertainty surrounding their validity. For example, a number of IPO’s have adopted fee-shifting bylaws, including: Alibaba, Smart & Final, and ATD Corp. These bylaws purport to make investors liable for all litigation-related costs of the defendants, unless the investors obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought. Not surprisingly, they are being challenged when they are raised before the Delaware Court of Chancery.
Perhaps recognizing the risk of this type of challenge, some companies (Smart & Final) have eschewed bylaws in favor of amendments to the articles/certificate.