BoardroomDirect: Issues in brief

BoardroomDirect®
Update on the current board issues: June 2014

Issues in brief

 

Latest on Delaware fee-shifting bylaws

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On May 8 the Delaware Supreme Court upheld an ATP Tour Inc. bylaw that calls for a shareholder plaintiff to pay the company’s legal fees when the plaintiff is unsuccessful in court against the company.

Delaware-incorporated public companies looking to adopt a fee-shifting bylaw similar to the one upheld recently by the Delaware Supreme Court in the Deutscher Tennis Bund and Qatar Tennis Federation vs. ATP Tour are watching a bill that may come up for debate in the Delaware legislature in January 2015.

The bill would prohibit companies from writing bylaws that would make shareholders pay the company’s legal fees if the shareholder sues and loses in court.

Bill sponsor Sen. Bryan Townsend, D-Newark, has delayed debate on the bill until at least January “to hear out concerns from businesses” after he received an opposition letter from the US Chamber of Commerce’s Institute for Legal Reform (ILR), according to The News Journal.

In a letter to Delaware lawmakers, ILR President Lisa Rickard said, “The Delaware Supreme Court's ATP decision gives corporations a way to protect their shareholders against these costs of abusive litigation. Why would the Legislature so quickly deprive shareholders of the opportunity to obtain that protection?"

The Corporation Law Section of the Delaware State Bar Association wrote the proposed legislation following the ATP Tour Delaware Supreme Court decision. Norman Monhait, head of the section, explained the reasoning behind the legislation, according to a Law360.com article:

“The significant liability risk created by such a provision could drastically reduce the ability of stockholders to bring even meritorious claims," he wrote. "While many believe there is more shareholder litigation than is desirable or constructive, a measure that potentially eliminates all such litigation could create serious concerns for the stockholders of Delaware corporations."

After the Delaware Supreme Court decision, some law firms were calling for boards to consider enacting fee-shifting bylaws. However, the Wachtel Lipton Rosen & Katz law firm cautioned against such bylaws. The firm also made a point that exclusive forum bylaws, which call for shareholder lawsuits to be filed in a particular venue, seem to be favored by Delaware courts.

“We are skeptical that the courts will approve public company bylaws of this sort absent a record of considered board deliberation establishing the bylaw’s situational reasonableness,” the Wachtel Lipton memo says. “And shareholder groups and proxy advisors are likely to vigorously oppose fee-shifting bylaws, including possibly by deploying withhold recommendations. At the same time, however, the decision sends an important affirmative signal that the courts are sympathetic to exclusive forum bylaw provisions…”

For more background on the ATP Tour Delaware Supreme Court decision, read the May 2014 edition of BoardroomDirect Issues in brief.

 

Some environmental groups suggest directors could be personally liable for climate-related litigation

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As part of an effort to persuade 32 major fossil fuel companies to cut back on greenhouse emissions, three international environmental organizations have indicated that more climate-change-related lawsuits are likely and suggested that directors may be held personally liable.

Greenpeace International, WWF International and the Center for International Environmental Law have written to the executives of large insurance corporations as well as fossil fuel and other major carbon companies, seeking clarity on who will pay the bill if such a lawsuit is brought against their directors or officers.

What’s significant to directors is that the letter was sent around the same time President Obama issued an executive order calling for power plants to cut carbon emissions 30% by 2030. Obama has asked the Environmental Protection Agency to implement the Clean Power Plan through a federal-state partnership.

The letter from the organizations stated: “Generally, liability policies provide coverage for claims that put individual directors’ and officers’ assets at risk. These liability policies protect individuals who are conducting their business in good faith but are at risk of being held liable for undesirable business occurrences, which may be beyond their control. However, a serious question is whether these policies would cover a director facing a climate-related claim.”

An appendix to the letter cites reasons for directors to worry about climate-change related litigation. “Fossil fuel companies and utilities have been and will continue to be the target of climate-related lawsuits,” it states. “As greenhouse gas emissions increase and associated climate impacts intensify, the number of lawsuits filed in countries around the world will only increase over time.”

The appendix cites a quote from Anderson Kill & Olick, a U.S.‐based law firm specializing in insurance coverage: “Corporations and their management and directors are facing more risks in connection with climate change‐related financial disclosures and the potential for shareholder and derivative suits based on alleged climate change‐related financial nondisclosures.”

Responses to the letter from the 32 companies will be published on the greenpeace website.