The Council of the Corporation Law Section of the Delaware State Bar Association (Council) released its proposed amendments to the DGCL. If approved by the Delaware legislature, most of the amendments would become effective on August 1, 2015. The amendments address, among other things, the permissibility of forum selection and fee-shifting provisions, and add new limitations on appraisal rights.

The proposed amendments add a new Section 115 to the DGCL that would:

Under the statute, "intracorporate claims" would mean claims that either:

This proposed amendment addresses the concern over the prevalence, expense and inefficiency of multi-forum litigation, where the same issue is litigated in multiple forums or even in both state and federal courts. If approved, the amendment would enshrine the Delaware Court of Chancery's holding in Boilermakers Local 154 Retirement Fund v. Chevron Corporation, which upheld forum-selection by-laws that were unilaterally adopted by the boards of directors of two companies (73 A.3d 934 (Del. Ch. 2013)). For more on this decision, see Legal Update, Delaware Court of Chancery Upholds Boards' Unilaterally Adopted Forum Selection By-laws.

However, the proposed amendment would also prohibit charter or by-law provisions that select a non-Delaware venue as the exclusive forum for intracorporate claims. This amendment would have the effect of overturning the Court of Chancery's ruling in City of Providence v. First Citizens BancShares, Inc., which allowed a Delaware corporation's board to adopt North Carolina as the company's exclusive forum for intracorporate litigation (99 A.3d 229 (Del. Ch. 2014)). For more on this decision, see Legal Update, Delaware Court of Chancery Upholds Board-adopted By-law Selecting Foreign Jurisdiction as Exclusive Forum. The amendment would only invalidate provisions that select a non-Delaware forum as the exclusive forum; it would not prohibit a forum-selection clause that selects both Delaware and a non-Delaware forum for intracorporate claims arising under the DGCL.

Although exclusive non-Delaware forums would no longer be permitted in the charter or by-laws, the proposed new Section 115 would not forbid exclusive non-Delaware forum provisions contained in a stockholders agreement or other writing signed by the stockholder against whom the provision is to be enforced. In addition, although forum-selection provisions would be permitted as a legal matter, the statute would not prevent a court from considering issues of equity in the adoption of the provision.

This amendment, if adopted, would be effective on August 1, 2015.

The proposed amendments would add a new Section 102(f) and amend Section 109(b) of the DGCL to prohibit any provision in the certificate of incorporation or by-laws of stock corporations that shift the corporation's or any other party's attorney's fees or expenses to the stockholder in an intracorporate claim (as defined in new Section 115).

These amendments are proposed in response to the decision in ATP Tour, Inc. v. Deutscher Tennis Bund, in which the Delaware Supreme Court ruled that the board of a Delaware non-stock corporation can, for a proper purpose, adopt a fee-shifting by-law that requires a plaintiff-stockholder to pay the corporation's legal expenses if the plaintiff loses on a claim it has brought against the corporation (91 A.3d 554 (Del. 2014)). The underlying principles of the decision have been widely understood as applying equally to ordinary, stock-issuing Delaware corporations, which ignited a great deal of concern among stockholders and practitioners.

Supporters of fee-shifting provisions have argued that the provisions would help stem the tide of rote class-action suits that are brought over nearly every public M&A deal and which often cause the corporation expense with little commensurate benefit. The Council, however, reasons that the proposed amendments prohibiting fee-shifting provisions in the stock-corporation context are necessary because:

The Council considered various ways to permit limited fee-shifting provisions where the action brought against the corporation was of limited merit and to add procedural safeguards to avoid abuse (such as where a majority stockholder adopts the provision). The Council concluded, however, that the task of finding the right balance between necessary and frivolous litigation should be left to the courts on a case-by-case basis.

As with the forum-selection proposal, the proposed amendments on fee-shifting are not intended to affect the enforcement of a stockholders agreement or other writing signed by the stockholder that includes a fee-shifting provision (though this is of little consequence for public corporations). The proposed amendments do not affect the ATP Tour holding's application to non-stock corporations.

These amendments, if adopted, would be effective on August 1, 2015.

For more on the developments leading to these proposed amendments, see Legal Updates:

The proposed amendments to the appraisal statute seek to curtail appraisal demands in deals where the target company's stock was publicly traded. The proposed amendments would:

These amendments are proposed in response to increasing concern about the sharp rise in appraisal activity as certain hedge funds dedicated to "appraisal arbitrage" have actively sought target companies in which to invest after the announcement of a merger. These arbitrageurs acquire shares in the merging company for the express purpose of seeking appraisal. The amendments also aim to put an end to the situation in which a judge must decide between two competing valuation experts, particularly when the market has already established a value for the shares (a lament most recently voiced in In re Appraisal of Ancestry.com, Inc., (Del. Ch. Jan. 30, 2015)).

The amendments to Section 262(g) establish a de minimis exception to appraisal rights, under the theory that it will minimize the risk that appraisal will be used to obtain a settlement because of the nuisance value of litigation. Additionally, the Council reasoned that it was difficult to justify requiring judicial determination of value in circumstances where 99% of the stockholders accepted the merger consideration or the amount in dispute was less than or approaching the cost of litigation. The de minimis exception will not apply, though, to short-form mergers under Section 253 or 267 because appraisal in these circumstances may be the only remedy available.

The amendments to Section 262(h) address the concern that the statutory interest rate mandated under Section 262(h) since 2007 has encouraged interest arbitrage by appraisal claimants because that interest rate has been higher than money market and government yields. While the Council did not find empirical support for the existence of interest arbitrage, it did find that corporations should have the option to stop the accrual of interest during the appraisal proceedings by paying an amount of its choosing to the appraisal claimants. Interest will thereafter only accrue on the amount of the judicial award that is in excess of the amount already paid. This option will decrease any incentive to engage in interest arbitrage.

Notably, the Council declined to propose limiting appraisal rights to shares held before the merger is publicly announced. This leaves intact the rulings in cases like In re Appraisal Ancestry.com, Inc., (Del. Ch. Jan. 5, 2015) and In re Appraisal of Transkaryotic Therapies, Inc., (Del. Ch. 2007), in which the Court of Chancery held that if Cede & Co., as the nominee for The Depository Trust Company (DTC), held more shares that abstained or voted against the merger than the number of shares that ultimately sought appraisal, then any beneficial owner through DTC can seek appraisal, even if it acquired its shares after the record date. For more on this "share-tracing" issue, see Practice Note, Appraisal Rights.

These amendments, if adopted, would be effective only with respect to transactions consummated according to agreements entered into on or after August 1, 2015. They would not affect pending litigation.

The proposed amendments would also:

These amendments, if adopted, would be effective August 1, 2015, except for the amendment to Section 391(c), which would be effective upon its enactment into law.

In addition to the proposed amendments to the DGCL is proposed legislation to create a new Chapter 58, Title 10 of the Delaware Code, entitled the "Delaware Rapid Arbitration Act." The new chapter would provide an option for business entities formed in Delaware to resolve business disputes through voluntary arbitration conducted by expert arbitrators under strict timelines. Under the proposed new chapter, arbitrations commenced under Chapter 58 must be completed within 120 days, with only one 60-day extension possible if all parties and the arbitrator agree. The new chapter would not be available for disputes:

This is not the first attempt by Delaware to introduce legislation that would provide a more prompt resolution to business disputes. In January 2010, the Delaware Court of Chancery issued an order adopting new voluntary arbitration rules for business disputes involving a claim solely for monetary damages. Those rules were subsequently found to be unconstitutional because the proposed arbitration proceedings would function essentially as civil bench trials to which there is a qualified right of public access under the First Amendment (see Legal Update, Third Circuit Finds Delaware Judicial Arbitration Procedure Unconstitutional).

In contrast, the new proposed chapter here would avoid the constitutionality issue because the arbitrators are not judges and the arbitrations do not take place in the courthouse. The proceedings under this new chapter would be private and confidential as with other private arbitrations, but if a challenge is filed with the Delaware Supreme Court, the proceedings would be treated as a typical appeal and subject to the court's public's right of access rules.

This amendment, if adopted, would be effective 30 days after enactment.