We Are Not Going to Take It Anymore! Fee-Shifting Bylaws Allowed in Delaware

In ATP Tour, Inc. v. Deutscher Tennis Bund, 2014 WL 1847446
(Del. May 8, 2014), the Delaware Supreme Court held that that state’s
General Corporation Law does not prohibit fee-shifting provisions in the
bylaws of Delaware non-stock corporations.  The bylaws at issue were
those of the ATP Tour, Inc. (the ATP), a Delaware non-stock corporation
consisting of its members and governed by a seven-member board. 
Id.  The ATP’s members include entities, such as the
Deutscher Tennis Bund and the Qatar Tennis Federation (collectively, the
“Federations”), that own and operate professional men’s tennis
tournaments.  Id. 

In the early 1990s when the Federations joined the ATP, they
agreed to be bound by the ATP’s bylaws, which could be adopted and/or
amended from time to time by the ATP’s board.  Id.  In
2006, the ATP’s board amended its bylaws to include a fee-shifting
provision, which required any member who initiated, or became involved in,
litigation against the ATP or any member or owner, to reimburse the ATP
and any such member or owner for all litigation costs and expenses,
including reasonable attorneys’ fees, that the parties incurred in
connection with the claim.  Id.  Such reimbursement was
allowed if the claiming party did “not obtain a judgment on the merits
that substantially achieves . . . the full remedy sought.”
 Id.

After the ATP’s board voted in 2007 to make changes to a
tournament owned and operated by the Federations, they sued the ATP and
six of its board members.  Id.  The Federations did not
prevail on any of their underlying claims and the ATP, pursuant to its
fee-shifting bylaws, moved to recover its legal fees and other litigation
expenses.  Id.

ATP Tour has three main holdings: (1) fee-shifting
bylaws are permissible under Delaware law; (2) fee-shifting bylaws are
unenforceable if adopted for an improper purpose; and (3) as a
general rule, an amendment to a corporation’s bylaws is enforceable
against members who join the corporation prior to the amendment’s
enactment.  Id.  The Supreme Court determined that
fee-shifting bylaws are facially valid under Delaware law because bylaws
are presumed valid and no Delaware statute or principle of common law
prohibited the enactment of fee-shifting bylaws.  Id. 
The court noted, however, that fee-shifting bylaws will not be
enforced if adopted or used for an inequitable purpose. 
Id.  Determining whether the bylaws were enacted for a
proper purpose will depend on the circumstances under which the provisions
were adopted and invoked.  Id.  Notably, the court
stated that “[t]he intent to deter litigation . . . is not invariably an
improper purpose.”  Id.  Therefore, a fee-shifting
bylaw that was enacted with “an intent to deter litigation would not
necessarily render the bylaw unenforceable in equity.”  Id. 
Finally, the court held that a fee-shifting bylaw amendment is
enforceable against members who join the corporation prior to the
amendment’s enactment as long as the corporation follows the proper
procedure in amending the bylaws in question.  Id. 

A Delaware non-stock corporation now has the option to adopt
fee-shifting bylaws.  If it decides to do so, the corporation must
ensure that it properly documents that it is adopting the provision both
for a proper purpose and pursuant to the corporation’s certificate of
incorporation and bylaws.  When it comes time to invoke the
fee-shifting bylaw, the corporation must be able to establish that it is
not being done for an inequitable purpose.  

Although the holding of ATP Tour only applies to
Delaware non-stock corporations, in principle the reasoning of the
Delaware Supreme Court applies equally to Delaware stock
corporations.  As a result, opposition to this proposal has arisen
swiftly among some members of the Delaware bar, and legislation has been
already proposed that would prohibit stock corporations from imposing
fee-shifting provisions.  The Delaware state legislature is expected
to decide on the proposed legislation by June 30, 2014.