Why Updating Corporate Bylaws Should Be on Your Radar
February 13, 2017
If your company has not updated its corporate bylaws in a few years, you could be unknowingly exposing yourself to liability.
If your company has not updated its corporate bylaws in a few years, you could be unknowingly exposing yourself to liability. In fact, the beginning of the year is a great time to review all corporate governing documents to make sure that they reflect recent changes in the law.Updated bylaws are particularly important for the many corporations that call Delaware home. Over the past several years, the state has made several key updates to its corporate laws. Two notable changes impact corporate bylaws. Below is a brief summary.
Forum Selection Bylaws
Recent amendments to the Delaware General Corporation Law (DGCL) authorized Delaware corporations to include forum selection provisions in their certificates of incorporation or bylaws that require “internal corporate claims” be brought exclusively in the Delaware courts, including the federal court. “Internal corporate claims” include claims that are based upon a violation of a duty by a current or former director or officer or stockholder in such capacity, or claims as to which the DGCL confers jurisdiction upon the Court of Chancery. The amendment does not prohibit a forum-selection clause that includes an additional forum, such as the state where the company is headquartered, so long as non-Delaware courts are not the sole forums for bringing internal claims.
Corporations that have existing forum selection bylaws should review them to determine whether they comport with the new changes. In addition, corporations that have not yet adopted forum selection bylaws may wish to do so now that they are becoming more widely accepted.
Prohibition on Fee-Shifting
The DGCL was also amended to prohibit certain kinds of fee-shifting provisions in certificates of incorporation and bylaws of Delaware stock corporations. Pursuant to a 2015 amendment to the DGCL, the bylaws of Delaware corporations “may not contain any provision that would impose liability on a stockholder for the attorneys’ fees or expenses of the corporation or any other party in connection with an internal corporate claim.” The amendment addressed questions that arose in the wake of the Delaware Supreme Court’s ruling in ATP Tour, Inc. v. Deutscher Tennis Bund, in which the court held that fee-shifting bylaws in a non-stock corporation were facially valid. That decision is still good law with respect to non-stock corporations.
Last month, the Delaware Court of Chancery confirmed that fee-shifting bylaws governing internal corporate claims are impermissible for stock corporations. The provision at issue purported to shift fees to shareholders who file an internal corporate claim outside of Delaware and fail to obtain a judgment that substantially achieves the remedy sought.
Process of Updating Bylaws
Amending the bylaws of a corporation is a multi-step process that should be conducted in consultation with an experienced corporate attorney. The company’s current bylaws will typically dictate the process for holding a meeting of the board of directors and the number of votes required for an amendment to pass. The bylaws will also govern the process for holding a shareholder vote.
Is your company considering updating its corporate bylaws? Do you have any questions regarding the matter? If so, please contact me, Jeffrey Cassin, at 201-806-3364.