Delaware Supreme Court Finds Fee-Shifting Provisions in Bylaws to Be Facially Valid
In a unanimous en banc opinion and in response to certified questions of law from the U.S. District Court for the District of Delaware, the Delaware Supreme Court held that a fee-shifting provision contained in a non-stock corporation's bylaws requiring unsuccessful plaintiffs to bear the costs of intra-corporate litigation may be valid and enforceable under Delaware law. Furthermore, the Delaware Supreme Court in ATP Tour, Inc. v. Deutscher Tennis Bund determined that such a bylaw will "normally apply to all members of a non-stock corporation regardless of whether the bylaw was adopted before or after the member in question became a member."1
ATP Tour, Inc. (ATP) is a non-stock Delaware membership corporation that operates a professional men's tennis tour. In the early 1990s, Deutscher Tennis Bund (DTB) and Qatar Tennis Federation (QTF), two entities that own and operate professional men's tennis tournaments, joined ATP. In joining ATP, DTB and QTF agreed to be bound by ATP's bylaws, as amended from time to time. In 2006, ATP's seven-member board of directors amended ATP's bylaws and adopted a fee-shifting provision that required plaintiffs to bear all fees, costs and expenses incurred in intra-corporate litigation if said plaintiffs do "not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought."2
When ATP's board voted to change the tennis tour schedule and format in 2007, DTB and QTF subsequently filed suit against ATP and six of ATP's board members in the U.S. District Court for the District of Delaware, alleging federal antitrust claims and fiduciary duty claims under Delaware law. After DTB and QTF failed to prevail on any of their claims, ATP moved to recover its fees, costs and expenses, pursuant to the fee-shifting provision in its bylaws and Rule 54 of the Federal Rules of Civil Procedure. At first, the District Court of Delaware denied ATP's Rule 54 motion, finding that ATP's fee-shifting bylaw was contrary to the policy underlying the federal antitrust laws. However, after ATP appealed, the U.S. Court of Appeals for the Third Circuit vacated the district court's order, holding that the district court should have first decided whether ATP's fee-shifting bylaw was enforceable as a matter of Delaware law. As a result, on remand, the District of Delaware found that the enforceability of ATP's fee-shifting provision presented a novel question of Delaware law that warranted the submission of certified questions of law to the Delaware Supreme Court.
In holding that directors of a Delaware non-stock corporation can lawfully adopt a bylaw provision that shifts all litigation fees, costs and expenses to a plaintiff in intra-corporate litigation, the Delaware Supreme Court noted that a corporation's bylaws are presumed to be valid under Delaware law. The Delaware Supreme Court further noted that, in order to be facially valid, a bylaw "must be authorized by the Delaware General Corporation Law (DGCL), consistent with the corporation's certificate of incorporation, and its enactment must not be otherwise prohibited."3 As the Delaware Supreme Court went on to explain, a fee-shifting bylaw is facially valid and is not prohibited under the DGCL, any other Delaware statute, or Delaware common law.
Although the Delaware Supreme Court concluded that a fee-shifting bylaw is facially valid, it likewise emphasized that even a facially valid bylaw will not be enforced "if adopted or used for an inequitable purpose."4 However, because the certified questions before the court addressed only questions of law, the Delaware Supreme Court’s decision did not address the enforceability of the bylaw at issue, which turned on the application of specific factual circumstances not before the court. While the Delaware Supreme Court did not examine whether the bylaw at issue was adopted or used for an improper purpose, it did note that the "intent to deter litigation, however, is not invariably an improper purpose."5
Notably, in answering the certified questions before it, the Delaware Supreme Court also concluded that a fee-shifting provision can be enforceable against members who joined the non-stock corporation before the provision's enactment, assuming that the provision is otherwise valid and enforceable.
While the ATP Tour decision addressed a fee-shifting provision in the context of a non-stock corporation's bylaws, the decision's potential application to stock corporations prompted the Delaware legislature to consider potential amendments to the DGCL that would prohibit the adoption of fee-shifting provisions in Delaware stock corporations' charters or bylaws. A recent vote before the Delaware State Senate on a bill that would amend the DGCL to prohibit fee-shifting provisions in stock corporations' bylaws was recently delayed until early 2015 in order to allow for further consideration of the bill.
1 91 A.3d 554, 2014 WL 1847446, at *1 (Del. May 8, 2014).
3 Id. at *3.
5 Id. at *4.