Fee-Shifting Provisions Enforceable In Bylaws of Delaware Non-Stock Corporations

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May 13 — Responding to a certified question, the Delaware Supreme Court concluded May 8 that fee-shifting provisions in the bylaws of Delaware non-stock corporations can be valid and enforceable .  

However, Justice Caroline Berger concluded, whether the provision in this case is enforceable “depends on the manner in which it was adopted and the circumstances under which it was invoked.” The court did not answer those questions.

Schedule Changes

The court recounted that ATP Tour Inc. is a Delaware membership corporation that operates a professional men's tennis tour. ATP's members include professional tennis players and entities that own and operate professional men's tennis tournaments. Two such entities are Deutsche Tennis Bund and Qatar Tennis Foundation—collectively, the Federations.

ATP, meanwhile, is governed by a seven-member board: three directors elected by tournament owners; three by player-members; and the seventh directorship held by ATP's chairman and president.

Upon joining ATP in the early 1990s, the court continued, the Federations agreed to be bound by ATP's bylaws, “as amended from time to time.” In 2006, the board amended ATP's bylaws to include a provision requiring unsuccessful plaintiffs in intra-corporate litigation to pay attorneys' fees and costs.

In 2007, the ATP board voted to change the tour's schedule and format. “Displeased by these changes, the Federations sued ATP and six of its board members” in the U.S. District Court for the District of Delaware, alleging federal antitrust violations and breach of fiduciary duty under Delaware law.

After the Federations failed to prevail on any of their claims, ATP moved to recover its legal fees, costs and expenses. However, the state high court said, the district court concluded that the fee-shifting provision was contrary to the policy underlying the federal antifraud laws and denied ATP's motion.

On ATP's appeal, the U.S. Court of Appeals for the Third Circuit vacated the district court's order; it concluded that the district court should have decided whether the fee-shifting provision was enforceable under Delaware law before deciding the federal preemption question.

On remand, the district court certified four questions of law to the state high court, saying the enforceability issue was a novel question of Delaware law that the Delaware Supreme Court should address in the first instance.

Four Questions

Answering each question in turn, the court first concluded that the board of a Delaware non-stock corporation lawfully may adopt a bylaw that shifts litigation expenses to a plaintiff in an intra-corporate lawsuit that does not “substantially achieve[]” the remedy sought.

However, the court said, whether the specific ATP fee-shifting provision is enforceable depends on how it was adopted and the circumstances in which it was invoked. “Bylaws that may otherwise be facially valid will not be enforced if adopted or used for an inequitable purpose.”

Second, the court concluded, the bylaw, if valid and enforceable, could shift fees against a member that achieves no relief at all, even if the bylaw might be unenforceable in a different situation where the member obtains some relief.

The third certified question asks whether the bylaw is rendered legally unenforceable if one or more directors “subjectively intended the adoption of the bylaw to deter legal challenges by members to other potential corporate action then under consideration.”

Saying it cannot “respond fully,” the state high court stated that legally permissible bylaws adopted for an improper purpose are unenforceable in equity. “The intent to defer litigation, however, is not invariably an improper purpose.”

Fee-shifting provisions by their nature deter litigation, the court said. “Because fee-shifting provisions are not per se invalid, an intent to deter litigation would not necessarily render the bylaw unenforceable in equity.”

Statutory Matter

Finally, the court turned to the fourth certified question—whether a bylaw amendment is enforceable against a member that joins the corporation before the bylaw was enacted. “Assuming the provision is otherwise valid and enforceable, as a statutory matter the answer is yes.”

In sum, the court concluded, a fee-shifting provision is not per se invalid under Delaware law, and the fact that it was adopted after an entity became a member does not affect its enforceability.

The court declined to state whether the ATP bylaw at issue in this case “was adopted for a proper purpose or is enforceable in the circumstances presented.”

To see the decision, go to http://www.bloomberglaw.com/public/ document/ATP_Tour_Inc_v_Deutscher_ Tennis_Bund_No_534_2013_ 2014_BL_129345_D.

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