"Fee-Shifting Bylaws: The Delaware Supreme Court Decision in ATP Tour, Its Aftermath and the Potential Delaware Legislative Response The Decision"

by Skadden, Arps, Slate, Meagher & Flom LLP

On May 8, 2014, the Delaware Supreme Court issued an opinion in ATP Tour, Inc. v. Deutscher Tennis Bund (German Tennis Federation), No. 534, 2013 (Del. May 8, 2014), holding that fee-shifting provisions in a Delaware non-stock corporation’s bylaws are not per se invalid. The bylaw at issue shifted all litigation expenses to an unsuccessful plaintiff in intra-corporate litigation who did “not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought.” The court noted it was not deciding whether the specific bylaw at issue was adopted for a proper purpose or enforceable under the circumstances.

The court answered four certified questions from the United States District Court for the District of Delaware as follows: (1) Fee-shifting bylaws may be lawfully adopted under Delaware law; (2) If otherwise valid and enforceable, the bylaw could shift fees if a plaintiff obtained no relief in the litigation (given the difficulty in applying a “substantially achieves” standard in the bylaw at issue); (3) The bylaw would be unenforceable if adopted for an improper purpose (notably, the court remarked that “an intent to deter litigation would not necessarily render the bylaw unenforceable”); and (4) The bylaw would generally be enforceable against members who joined the corporation before the provision’s enactment. It is now up to the district court to rule on the adoption and enforceability of the fee-shifting bylaw under the particular circumstances in the litigation before it.

Varied Reactions

The ATP Tour decision received a great deal of attention, from both the media and the legal community. A number of commentators suggested that the decision would extend to stock corporations, including public companies, and that such companies consider adopting a fee-shifting bylaw in order to mitigate the increasing phenomenon of stockholder litigation that imposes significant costs, monetary and otherwise, on such companies. In the mergers and acquisitions transaction arena, for example, in 2013, stockholder plaintiffs filed lawsuits challenging approximately 94 percent of all announced deals, versus 54 percent in 2008. It seems to have become a knee-jerk reaction to file lawsuits upon the announcement of a deal. Shifting the cost of defending such litigation to unsuccessful plaintiffs would likely impose meaningful discipline on this phenomenon, by forcing a more merits-based assessment of the potential claims at the outset, or at least after initial discovery has been concluded.

However, unfavorable consequences may also result. Broadly speaking, there is a significant risk that efforts by boards of directors of public companies to curtail stockholder litigation will be perceived by some stockholders, governance advocates and proxy advisory firms as protectionist, anti-corporate governance actions deserving prompt and clear disapproval if attempted. In today’s world, such disapproval could easily come not only in the form of public statements, but also in the form of stockholder action, such as stockholder proposals to repeal any board-adopted bylaw and/or “vote no” campaigns against some or all directors who supported adoption of the offending bylaw (with particular focus on the members of the governance committee of the board). In addition, there is the risk that adoption of fee-shifting bylaws could significantly deter, or eliminate, even meritorious claims.

The Potential Delaware Legislative Response

In response to the decision, the Corporation Law Council of the Delaware State Bar Association has proposed legislation that, if adopted by the legislature, would limit applicability of the ATP Tour decision to non-stock corporations, and make clear that fee-shifting bylaws, or other charter or bylaw provisions, may not impose monetary liability on stockholders of stock corporations. The proposed amendments are intended to eliminate any implication that the limited liability protection of stockholders underlying Delaware corporation law can be undermined.

The proposed amendments include a change to Section 102(b)(6) of the Delaware General Corporation Law (DGCL), which permits a certificate of incorporation to include a provision imposing personal liability for the debts of the corporation on its stockholders to a specified extent and upon specified conditions, to clarify that any such provision may impose liability “based solely on [a stockholder’s] stock ownership,” and not on any other status or action of the stockholder. (Stockholders would continue to be subject to possible liability not arising from a charter provision, but based instead on specific acts or omissions of a stockholder, such as a guarantee of corporate debt or tortious conduct.)

The proposed amendments also include a new Section 331 of the DGCL that is intended to confirm and codify the limited liability nature of corporations by expressly stating that provisions in a certificate of incorporation or in bylaws may not impose monetary liability, or responsibility for corporate debts, on stockholders other than to the extent permitted by Section 102(b)(6), as described above, or by Section 202 of the DGCL, which permits transfer restrictions imposed by charter, bylaw or stockholder agreement that could result in monetary liability to stockholders.

The proposed new DGCL Section 331 would read as follows:

Notwithstanding any other provision of this chapter, neither the certificate of incorporation nor the bylaws of any corporation may impose monetary liability, or responsibility for any debts of the corporation, on any stockholder of the corporation, except to the extent permitted by Sections 102(b)(6) and 202 of this title.

Notably, the synopsis to the proposed amendments clarifies that nothing in the proposed amendments is intended to limit the power of a court to impose sanctions under applicable law. If adopted by the legislature, the proposed amendments would become effective August 1, 2014.

In essence, the proposed legislation, if adopted, in furtherance of ensuring the doctrine of limited liability of stockholders, would answer with a clear “no” the question that has been debated since the ATP Tour decision as to whether public Delaware stock corporations may adopt fee-shifting bylaws. If the proposed legislation is not adopted, Delaware public companies will need to give careful consideration to whether, when and how to address the possibility of adopting a fee-shifting bylaw.

Download PDF

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.

© Skadden, Arps, Slate, Meagher & Flom LLP | Attorney Advertising

Written by:

Skadden, Arps, Slate, Meagher & Flom LLP

Skadden, Arps, Slate, Meagher & Flom LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.