Delaware Non-Stock Corporations May Adopt Bylaws That Shift Fees To Unsuccessful Plaintiffs In Intra-Corporate Litigation

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On May 8, 2014, the Delaware Supreme Court held that, under Delaware law, fee-shifting provisions in non-stock corporations’ bylaws can be valid and enforceable (“facially valid”) and may be enforced if not adopted or utilized for an inequitable or improper purpose. ATP Tour, Inc. v. Deutscher Tennis Bund, No. 534, 2013 (Del. May 8, 2014) (Berger, J.). The court further ruled that, assuming such a bylaw is otherwise valid and enforceable, it could bind members who joined the corporation before the provision’s enactment, at least where, as in the case before it, such members agreed to be bound by rules that may be adopted and/or amended from time to time by the board. In reaching its ruling, the court cited approvingly Boilermakers Local 154 Retirement Fund v. Chevron Corporation, a Delaware Court of Chancery decision authored by former Chancellor, now Chief Justice, Leo E. Strine, Jr., upholding the facial validity of forum selection bylaws (see Pepper’s Client Alert dated June 26, 2013). The court wrote that the Delaware General Corporation Law permits a corporation to, “in its certificate of incorporation, confer the power to adopt, amend or repeal bylaws upon the directors,” and if directors are so authorized, “stockholders will be bound by bylaws adopted unilaterally by their boards.”

ATP Tour, Inc. (ATP) is a Delaware membership corporation that operates a global professional men’s tennis tour. Two members of ATP sued ATP and six of its board members in the United States District Court for the District of Delaware, alleging federal antitrust and breach of fiduciary duty claims. At trial, plaintiffs did not prevail on any claim, and ATP moved to recover its fees, costs, and expenses based on ATP’s fee-shifting bylaw. After an intermediate ruling, appeal, and remand, the District Court certified questions of law regarding the bylaw to the Supreme Court of Delaware.

In responding to the certified questions, the Delaware Supreme Court explained that although Delaware follows the “American Rule,” under which parties to litigation generally must pay their own attorneys’ fees and costs, contracting parties may agree to modify the American Rule and obligate the losing party to pay the prevailing party’s fees. The court stated that because bylaws are contracts among a corporation’s stockholders, “a fee-shifting provision contained in a non-stock corporation’s validly-enacted bylaw would fall within the contractual exception to the American Rule.”

That fee-shifting provisions in non-stock corporations’ bylaws are facially valid does not mean, however, that all such provisions are always enforceable. Rather, “[b]ylaws that may otherwise be facially valid will not be enforced if adopted or used for an inequitable purpose,” such as director entrenchment. The intent to deter litigation by way of fee shifting, however, is not invariably an improper purpose. While the Delaware Supreme Court could not and did not decide the enforceability of the bylaw at issue, since that was a matter for the federal court, it determined that “under Delaware law, a fee-shifting bylaw is not invalid per se, and the fact that it was adopted after entities became members will not affect its enforceability.”

A copy of the decision may be found here.

 

Topics:  American Rule, Board of Directors, Bylaws, Fee-Shifting Statutes

Published In: Business Organization Updates, Civil Procedure Updates, General Business Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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