Schiff Hardin LLP May 15, 2014
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Fee-Shifting: The Next Bylaw in the Delaware Defensive Arsenal?

Last year, Delaware courts blessed the use of forum selection bylaws, which allow corporations to predetermine the venue of litigation between the corporation and its officers and directors on the one hand and its stockholders on the other in Boilermakers Local 154 Ret. Fund v. Chevron Corp., 73 A.3d 934, 956 (Del. Ch. 2013). These bylaws may discourage litigants who prefer to proceed in a forum other than the one chosen by the corporation. Now the Supreme Court of Delaware has issued a ruling that may further strengthen the corporate hand in deterring stockholder litigation.

On May 8, 2014, in ATP Tour, Inc. v. Deutscher Tennis Bund, No. 534, 2013 (http://courts.delaware.gov/opinions/download.aspx?ID=205490), the Supreme Court of Delaware answered several abstract questions regarding the bylaw of a Delaware non-stock corporation that were certified to that court by the federal district court in Delaware. The underlying case was brought by several members of the ATP Tour, the men's professional tennis tour. When the events operated by these members were downgraded, the members sued ATP and six of its directors, alleging antitrust and breach of fiduciary duty claims. After the plaintiffs lost their claims in the trial court, ATP sought recovery of its legal fees, costs, and expenses under ATP's fee-shifting bylaw, which provided that the losing party must pay the litigation expenses of the corporation and its directors in certain circumstances.1 When faced with interpreting the bylaw, the district court certified several questions under Delaware law to the Supreme Court of Delaware, which answered the questions — in the abstract — in its May 8 decision.

In upholding the bylaw in concept, without addressing the facts of the specific case, the court held that a bylaw is presumptively valid and will be facially valid if it is authorized by law and consistent with the corporation's certificate of incorporation. A fee-shifting bylaw generally meets these criteria, as it relates to the business of the corporation and the conduct of its affairs. Such a bylaw is, in concept, a contractual modification of the traditional American Rule that provides for each party to bear its own fees in litigation, regardless of the outcome of the case.

A bylaw will not be enforced, however, if it is adopted or used for an inequitable purpose, and so a court faced with applying a facially valid fee-shifting bylaw will have to address the circumstances of its adoption. That is, the court will have to determine if appropriate corporate procedures were followed and the bylaw was adopted for a proper corporate purpose. It does appear that if the sole purpose was to achieve fee-shifting and nothing improper, such as entrenching incumbents, a fee-shifting bylaw should be valid. The court also stated that adopting a bylaw to deter litigation was "not invariably an improper purpose."

Finally, the court held that such a bylaw can be enforced against members who join before adoption of the bylaw. In particular, one who joins and agrees to be bound by the rules adopted and amended by the board is bound by a bylaw validly adopted by the board after the member joins.

The court addressed only the specific questions presented to it, which involved a bylaw that shifted costs where the losing party did not substantially achieve the full remedy sought. The court did not address a bylaw that provides for partial fee shifting in a case with a mixed outcome.

Because the court cited cases and principles involving for-profit stock corporations and its analysis was not grounded in any unique features of the non-stock corporation, the ruling seems to have direct application to the stock corporation. To be sure, the district court in this case may be called upon to address the circumstances of the adoption of the bylaw, so that there is no assurance that this particular bylaw will survive further scrutiny. Nevertheless, subject to the important caveats in the opinion — such as following proper procedures and adoption for a proper purpose — we suggest that Delaware corporations (and possibly corporations organized in other jurisdictions) consider whether it is appropriate to adopt a fee-shifting bylaw, taking into account, among other considerations, the particular circumstances of the adoption and the procedure to be followed. At the same time, as the law in this area, as well as that of forum-selection clauses, evolves, it remains to be seen how receptive courts outside Delaware will be to these provisions.

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1 As set forth in the court's opinion, the bylaw provided:

(a) In the event that (i) any [current or prior member or Owner or anyone on their behalf ("Claiming Party")] initiates or asserts any [claim or counterclaim ("Claim")] or joins, offers substantial assistance to or has a direct financial interest in any Claim against the League or any member or Owner (including any Claim purportedly filed on behalf of the League or any member), and (ii) the Claiming Party (or the third party that received substantial assistance from the Claiming Party or in whose Claim the Claiming Party had a direct financial interest) does not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought, then each Claiming Party shall be obligated jointly and severally to reimburse the League and any such member or Owners for all fees, costs and expenses of every kind and description (including, but not limited to, all reasonable attorneys' fees and other litigation expenses) (collectively, "Litigation Costs") that the parties may incur in connection with such Claim.

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