United States: Delaware Supreme Court Finds Fee-Shifting Bylaws Valid

Keywords: Delaware, fee-shifting, bylaws,

A recent Delaware Supreme Court case, ATP Tour Inc. v. Deutscher Tennis Bund, No. 534, 2013 (Del. May 8, 2014),1 held that fee-shifting bylaws, which shift attorneys fees and costs to unsuccessful plaintiffs in intra-corporate litigation, can be enforceable under the Delaware General Corporation Law (DGCL). As a result of the publicity generated by this case, many companies are wondering about the ramifications of this opinion and whether they, too, should be adopting a fee-shifting bylaw. The short answer is that it is too soon to tell.

The ATP opinion is likely to be controversial. As a result of the decision, there may be legislative or regulatory action taken to limit, or even preclude, the adoption of fee-shifting bylaws by public companies. Corporate governance rating organizations and proxy advisors may adopt policies that could potentially lower a company's corporate governance rating or give rise to recommendations against the election of directors for companies that adopt a fee-shifting bylaw. At present, it is unclear whether adopting a fee-shifting bylaw would affect director and officer insurance premiums, or if it would actually deter litigation. The desirability of adopting such a bylaw, as well as the preferred terms of such a provision, may be affected by future responses to the ATP decision. Therefore, companies should determine whether it may be more appropriate to wait to consider further developments in this area before deciding to adopt a fee-shifting bylaw.

The Delaware Supreme Court Decision

The ATP case arose in the context of a Delaware non-stock membership corporation that operates a professional men's tennis tour. ATP's members include tennis players and entities that own and operate tennis tournaments. Two members brought an antitrust and Delaware fiduciary duty suit over a change in the format and schedule of the tennis tour. The corporation prevailed in the litigation and then sought to recover fees from the plaintiffs under a fee-shifting bylaw. The US District Court for the District of Delaware certified four questions to the Delaware Supreme Court concerning the enforceability of the fee-shifting bylaw under state law.2 The Supreme Court's opinion responded to these questions, but did not apply the law to the facts of the ATP litigation.

Specifically, the Supreme Court held that "a bylaw of the type at issue here is facially valid, in the sense that it is permissible under the DGCL, and that it may be enforceable if adopted by the appropriate corporate procedures and for a proper corporate purpose." The Supreme Court also held that the bylaw would be enforceable at least in a situation where the plaintiffs obtained no relief at all against the corporation. Although the Supreme Court noted that an improper purpose could render a legally permissible bylaw unenforceable in equity, it held that the intent to deter litigation would not invariably constitute an improper purpose and, therefore, would not necessarily render the provision unenforceable. Finally, the Supreme Court held that a bylaw amendment adopted by a board of directors can be enforceable against members who joined before the amendment was adopted if directors have the power in the certificate of incorporation to amend bylaws. The Supreme Court concluded by stating that "under Delaware law, a fee-shifting bylaw is not invalid per se, and the fact that it was adopted after entities became members will not affect its enforceability."

Practical Considerations

APPLYING THE SUPREME COURT'S DECISION TO A STOCK COMPANY

The ATP decision involved a Delaware non-stock corporation, but the reasoning in the opinion seems applicable to stock corporations as well. The opinion suggests that Delaware stock corporations, including the many public companies that are incorporated in Delaware, can adopt fee-shifting bylaw amendments by action of their boards of directors. However, a board that is considering such a provision must recognize that its enforceability is likely to depend on the facts and circumstances involved.

The reason for adopting a fee-shifting bylaw may be a key factor in determining whether that bylaw is enforceable. A bylaw that is adopted when litigation with a shareholder is looming (or already in progress) may be harder to defend than a bylaw that is adopted at a time when the board of directors can discuss the benefit of deterring unwarranted lawsuits in the abstract.

Enforceability may also be affected by the breadth of the provision. The ATP provision has a very broad trigger for shifting legal fees to a claimant, making each claimant jointly and severally liable if it "does not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought." A court might be more inclined to enforce a fee-shifting provision against a shareholder in a public company if the provision were narrower, for example, shifting fees only in a case where the shareholder lost or, in a derivative action, failed to properly plead demand futility. A provision that reflects a more neutral stance may be viewed with greater acceptance than a provision where the company seeks fee payment under most conceivable circumstances.

A public company board would also have to consider what kinds of actions would be subject to fee shifting: A derivative action? An individual or class action brought by a shareholder to challenge a merger or other transaction? A securities fraud case brought by purchasers of the company's stock?

Including securities fraud actions would likely raise the question of whether such clauses are enforceable under federal law. In the ATP litigation, the federal district court has indicated that it believes that federal law would preclude the fee-shifting provision from being enforced in a federal antitrust action. However, no definitive ruling has been made on that issue following the Supreme Court's ATP decision.

Companies incorporated outside of Delaware should carefully review the laws of their jurisdictions to determine if there are any statutory or case law principles that suggest that a fee-shifting bylaw may be unenforceable.

ADDITIONAL RAMIFICATIONS AND RESPONSES TO FEE-SHIFTING BYLAWS

Apart from the legal considerations outlined above, companies contemplating a fee-shifting bylaw should also consider a variety of practical issues. For example: How likely is it that such bylaws will in fact deter meritless litigation? Will they deter knee-jerk derivative actions? How about the lawsuits that are inevitably filed whenever a transformative transaction is announced? To the extent that such lawsuits typically end in a settlement, as opposed to a final disposition on the merits, a fee-shifting bylaw may not have as great a deterrent effect as the board may hope.

Another consideration is whether a forum selection bylaw should also be employed (whether alone or in combination with a fee-shifting provision) to deter meritless lawsuits. In June 2013, the Delaware Chancery Court upheld forum selection bylaw provisions adopted by Chevron Corporation and FedEx Corporation, which required intra-corporate disputes to be litigated exclusively in Delaware.3

The likely reaction of investors, corporate governance rating organizations and proxy advisors is another practical consideration to keep in mind. Bylaw amendments trigger a Form 8-K filing, which would have to describe how the bylaws were amended. Public companies should expect adoption of a fee-shifting bylaw amendment to garner significant attention. If a decision is made to proceed with such an amendment, key officers and investor relations personnel must be prepared to respond to questions regarding the rationale and ramifications of the amendment. In fact, companies that decide to adopt fee-shifting bylaws may want to explain the reasons for the provision when the change is announced.

Public companies may face shareholder proposals to block their boards from adopting a fee-shifting bylaw provision or to repeal an existing fee-shifting bylaw. Shareholders only need to own at least $2,000 in market value, or 1 percent, of the stock of a public company for one year in order to be eligible to submit a shareholder proposal for inclusion in that company's proxy statement. It is possible that shareholders may be supported in such efforts by activists who may not be company shareholders. Because shareholders have the power to amend the bylaws, a shareholder proposal could be presented as a binding resolution that would not require further action by the board of directors. It is not clear that such a shareholder proposal would be successful, but unless the company is able to convince the Securities and Exchange Commission that there are grounds to exclude such proposal, it would bring the issue in front of the annual shareholders meeting.

Originally published May 21, 2014

Footnotes

1 Available at http://courts.delaware.gov/opinions/download.aspx?ID=205490.

2 The four questions that the US District Court certified for the Delaware Supreme Court to decide are as follows:

1. Is the board of directors of a Delaware non-stock corporation permitted to adopt a bylaw that applies in the event that a member sues the corporation or another member or the corporation sues a member, obligating the claimant to pay for all fees, costs, and expenses of the opposing party if the claimant "does not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought?"

2. Is such a bylaw enforceable against a member that obtains no relief at all on its claims against the corporation, even if it might be unenforceable if the member obtains some relief?

3. Is such a bylaw rendered unenforceable as a matter of law if any board members intended the adoption of the bylaw to deter legal challenges to other potential corporate action then under consideration?

4. Is such a bylaw enforceable against a member if it was adopted after the member joined the corporation, where the member had agreed to be bound by the corporation's rules "that may be adopted and/or amended from time to time?"

3 See our Legal Update "Forum Selection Provisions Upheld by Delaware Chancery Court," dated July 10, 2013, available at http://www.mayerbrown.com/files/Publication/767c1ccc-3f76-42d7-b13c-28943398c1fe/Presentation/PublicationAttachment/f9bc22c2-c0a6-4e96-b8f4-2cda3ed94d10/130710-UPDATE-CS-CapMkts.pdf.

Learn more about our Corporate & Securities practice.

Visit us at mayerbrown.com

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2014. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.