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.