On May 8, 2014, in ATP Tour, Inc. v. Deutscher Tennis Bund,
et al., No. 534, 2013, the Delaware Supreme Court ruled that a
bylaw shifting attorneys' fees and costs to the losing party in
intra-corporate litigation can be valid and enforceable under
Delaware law. While the case involved a member corporation and not
a stock corporation, the decision has favorable implications for
all Delaware corporate boards considering bylaws that could
affect—and inhibit—certain forms of shareholder
litigation. As a result of this decision, we recommend that all
Delaware corporations consider fee-shifting bylaw provisions while
also considering exclusive forum provisions.
ATP Tour, Inc. ("ATP") is a Delaware membership
corporation whose members include professional tennis players and
entities that own professional tennis tournaments. ATP's board
of directors amended its bylaws in 2006 to add a provision that
provided that, in the event a member asserts a claim against the
league [ATP] and does not obtain a judgment on the merits that
substantially achieves the full remedy sought, the member shall be
obligated to reimburse the league for all fees, costs, and expenses
incurred in connection with the claim.
In 2007, the tournaments owned and operated by the German Tennis
Federation and Qatar Tennis Federation were downgraded to a lower
tier and moved from the spring to the summer season. The
federations sued ATP on antitrust and breach of fiduciary duty
theories. ATP prevailed at trial and moved to recover its fees and
costs under its bylaw provision. After interim decisions relating
to issues of federal preemption, the District Court certified four
questions regarding the enforceability of the bylaw provision to
the Delaware Supreme Court.
The Delaware Supreme Court held:
Are Fee-Shifting Bylaws Permissible Under Delaware
Law? The Delaware Supreme Court held that fee-shifting
bylaws are consistent with Delaware law, noting that contracting
parties may agree to modify the so-called "American Rule"
(which generally requires parties to pay their own costs and fees,
regardless of the outcome of a litigation) and instead require the
losing party to pay the winner's attorneys' fees. Holding
that corporate bylaws are "contracts among a corporation's
shareholders," the court found that a fee-shifting bylaw would
constitute a permissible exception to the American Rule.
Is a Bylaw Enforceable Even Against Members Who Joined the
Corporation Before Its Adoption? The court held that, if
directors are authorized by the corporation's certificate of
incorporation to adopt, amend, or repeal bylaws, then stockholders
will be bound by bylaws adopted solely by the board. This
endorsement of the board's authority should have implications
for proxy advisor positions on such provisions, although we have
seen the advisory firms take a negative view of board action on
comparable changes, like exclusive forum provisions.
Could the Bylaw in Question Shift Fees if a Plaintiff
Obtained No Relief in the Litigation? This District Court
asked whether, even if the "substantially achieves"
language in the ATP bylaw made the bylaw unenforceable if a
plaintiff were to obtain some relief, a more limited version of the
ATP bylaw would at least be enforceable if no relief whatsoever
were obtained by a plaintiff. The court answered this question in
the affirmative.
Would the Bylaw in Question Be Unenforceable if Adopted for
an Improper Purpose? The court held that a legally valid
bylaw would be unenforceable in equity if adopted for an improper
purpose. Importantly, the court noted that the intent to deter
litigation is not, standing alone, an improper purpose.
There are some limitations on this decision inherent in the
procedural mechanism that brought it before the Delaware Supreme
Court. Thus, the court made clear that, given that it was
addressing only the certified questions of law submitted by the
District Court, not the merits of the dispute, it could not opine
on the facts or the validity of the specific bylaw provision at
issue.
Even given these limits, the decision is an important one that
could significantly limit plaintiffs' appetite for litigation
against Delaware corporations. Although ATP involved a
closely held non-stock corporation, and the certified questions
were framed accordingly, the reasoning in ATP should be
equally applicable to stock corporations. The court's
interpretation of the Delaware General Corporation Law, the
contract theory of bylaws endorsement, and the precedents cited
were not limited to non-stock corporations. Moreover, there does
not appear to be any principled basis to suggest that the decision
does not apply to Delaware companies generally. As with the
Chancery Court's opinion last summer upholding the
enforceability of an exclusive forum bylaw, see Boilermakers
Local 154 Ret. Fund v. Chevron Corp., 73 A.3d 934, 956 (Del.
Ch. 2013), the ATP opinion reinforces that traditional
contract law principles continue fully to apply to corporate bylaws
and that a board, if so authorized, may amend the bylaws in a
manner consistent with its exercise of business judgment.
Obviously, however, the argument is not over, and—especially
given the court's holding that fee-shifting provisions adopted
for an "improper purpose" could be unenforceable—a
board considering such bylaw amendments should do so carefully,
with the assistance of counsel, and in circumstances that
demonstrate it is a deliberate, well-considered step, taken for
valid purposes to protect the corporation's interests.
In addition, it is possible that the proxy advisory firms will
weigh in on this issue, much like they did on exclusive
jurisdiction bylaws last year. Still, adoption of a loser-pays
bylaw may well make sense for companies threatened by shareholder
litigation, or considering strategic assessment plans, and in all
events a loser-pays bylaw could be submitted for shareholder
ratification if the proxy rating firms weigh in later. As such, we
encourage companies to give this development appropriate
consideration.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
