As noted in a prior blog here, some companies have recently adopted fee-shifting provisions (i.e., language providing that a suing stockholder must pay the corporation’s legal fees and expenses if the stockholder does not obtain a judgment that substantially achieves the full remedy sought). Specifically, such provisions have now shown up in the bylaws of some Delaware and non-Delaware corporations, and at least two corporations, Alibaba Group Holding Limited (a Cayman Islands company) and Smart & Final Stores, Inc., have gone public with variations of fee-shifting bylaws in place.
To date, the Securities and Exchange Commission (SEC) has not taken any action with regard to these provisions, even though, in the Alibaba offering, the existence of the fee-shifting provision was arguably not even adequately disclosed. Some pressure is, however, being brought to bear on the SEC. For example, the chair of the SEC was recently asked by Senator Richard Blumenthal (D-CT) to take action. In his correspondence to the SEC, Senator Blumenthal states that the “potential ramifications” of the ATP decision allowing fee-shifting provisions are “immense,” and he goes on to elaborate on those potential ramifications. Senator Blumenthal then urges the SEC to refuse to permit registration statements to move forward for any company that includes such provisions.
Despite the pleas of Senator Blumenthal and others, the SEC seems content to wait, at least temporarily, for the outcome, from the Delaware courts or legislature. Even if the SEC continues to await the Delaware outcome and the outcome is that fee-shifting provisions are not allowed in Delaware “for profit” corporations, the SEC cannot be assured, however, that the problem has been cured, since other states may determine to allow such provisions. In the end, the SEC may be forced to act or see a demise of private enforcement of the U.S. securities laws. For now, though, the SEC continues to watch and wait.