ATP Tour, Inc. v. Deutscher Tennis Bund: The Delaware Supreme Court Upholds the Facial Validity of a Fee-Shifting Provision in the Bylaws of a Delaware Nonstock Corporation
June 12, 2014
In ATP Tour, Inc. v. Deutscher Tennis Bund, No. 534, 2013, 2014 WL 1847446 (Del. May 8, 2014), the Delaware Supreme Court, by Justice Berger, in responding to certified questions of law from the United States District Court for the District of Delaware (the “District Court”), held that a provision of a Delaware nonstock corporation’s bylaws that shifted litigation expenses to the losing party in intra-corporate litigation was facially valid under Delaware law and may be enforced if the provision was adopted through appropriate corporate procedures and for a proper corporate purpose.
ATP Tour, Inc. (“ATP”) is a Delaware nonstock corporation that operates a professional tennis tour. The dispute arose from litigation filed in District Court by plaintiffs, two members of ATP, against ATP and six of its seven directors challenging ATP’s decision to downgrade a tournament owned and operated by plaintiffs. Following a jury trial, judgment was entered in favor of ATP on all claims. Because plaintiffs did not prevail on any of their claims, ATP sought to recover its litigation expenses from plaintiffs pursuant to a provision in ATP’s bylaws providing that, in intra-corporate litigation, a plaintiff who “does not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought” is obligated to reimburse ATP “for all fees, costs and expenses of every kind and description.” Because the validity and enforceability of a fee-shifting bylaw presented a novel question of Delaware law, the District Court certified questions to the Delaware Supreme Court.
The Supreme Court began its analysis by noting that, to be facially valid, a bylaw provision must be authorized by the General Corporation Law of the State of Delaware (the “DGCL”), it must be consistent with the corporation’s certificate of incorporation, and its enactment must not be otherwise prohibited. Finding that such a bylaw was not prohibited by the DGCL, any other Delaware statute or common law, the Supreme Court held that a fee-shifting bylaw is facially valid under Delaware law. The enforceability of a fee-shifting bylaw, however, turns on the circumstances under which the bylaw is adopted and applied. Because the Court did not have sufficient facts to determine whether ATP’s fee-shifting bylaw was properly adopted or applied and because certified questions by their nature only address questions of law, the Supreme Court did not opine on the enforceability of ATP’s fee-shifting bylaw. Rather, the Supreme Court held that a fee-shifting bylaw, like the one adopted by ATP, may be enforceable if adopted by appropriate corporate procedures and for a proper corporate purpose. The Court further noted that bylaws that are facially valid will not be enforced if adopted or applied for an inequitable or improper purpose. Because the intent to deter litigation is not invariably an improper purpose, the fact that a board adopted a fee-shifting bylaw for the purpose of deterring litigation would not necessarily render the bylaw unenforceable. Finally, the Court held that, assuming that a fee-shifting bylaw is otherwise valid and enforceable, members who join the corporation prior to its adoption will be bound by the fee-shifting bylaw.
Proposed amendments to the DGCL were introduced in the Delaware General Assembly to clarify the application of the ATP Tour decision to Delaware stock corporations. Although the General Assembly has resolved to defer consideration of this matter until its next session in early 2015, it remains possible that legislation limiting the applicability of the ATP Tour decision to nonstock corporations and clarifying that, subject to certain limited statutory exceptions, charter and bylaw provisions may not be used to impose monetary liability on holders of stock in Delaware stock corporations, may be enacted.