Delaware Serves Up a Possible Game Changer with Validation of Fee-Shifting Bylaw

by Akin Gump Strauss Hauer & Feld LLP
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A recent decision of the Delaware Supreme Court may be a game changer in the world of stockholder litigation. In ATP Tour, Inc. v. Deutscher Tennis Bund (Del. May 8, 2014), the Delaware Supreme Court addressed the validity of a fee-shifting provision in a non-stock membership corporation’s bylaws.

The corporation at hand was ATP Tour, Inc. (ATP), the operator of the men’s professional tennis tour. Several members of ATP were disgruntled over certain tournament modifications and sued ATP and many of its directors in Delaware District Court. ATP prevailed on the merits in a jury trial.

ATP, relying on a bylaw amendment adopted by it directors in 2006 that added a “fee-shifting” provision, sought to obtain its legal fees and expenses. The ATP fee-shifting provision provided, in general, that any member asserting a claim against the corporation that does not obtain a judgment that substantially achieves, in substance and amount, the full remedy sought will be obligated to pay the corporation for all legal fees, costs and expenses incurred by the corporation in connection with the claim. The District Court asked the Delaware Supreme Court to, in part, decide whether fee-shifting provisions, such as that in the relevant ATP bylaw, are valid and, if so, whether they are valid against members who joined the corporation before the fee-shifting bylaw was adopted.

The Delaware Supreme Court found that the bylaw was permissible as a matter of law and facially valid, but went on to say that such a bylaw could be invalid if adopted or used for an improper purpose, importantly noting that “the intent to deter litigation, however, is not invariably an improper purpose.” The Delaware Supreme Court also said that “the fact it was adopted after entities became members will not affect its enforceability.”

Although the ATP case involved a non-stock corporation, it seems likely the decision will hold true for all Delaware corporations. Accordingly, the Court’s ruling may provide a significant advantage to corporations in that the appropriate adoption of a fee-shifting bylaw may not only protect corporations from litigation costs, it may deter stockholder litigation altogether. The fact that the Court found that the fee-shifting bylaw could be adopted after entities became members opens to doors for valid adoption of fee-shifting provisions by the boards of existing corporations (where the underlying board has specifically been given the power, in the corporation’s certificate of incorporation, to amend bylaws).

As a result of the ATP case, boards of Delaware corporations (where the board has bylaw amendment authority) should consider whether they should adopt fee-shifting bylaw provisions, keeping in mind, among other things, that adoption for “improper purposes” may be invalid and that resulting stockholder reaction may be negative.

Only time will tell if the Delaware Supreme Court’s decision in the ATP case is a game changer for Delaware corporations vis-à-vis stockholder litigation or merely a single ace that won’t dramatically impact the larger match .

 

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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