United States: Delaware Supreme Court Holds That Boards May Adopt Fee-Shifting Bylaws

In ATP Tour, Inc. v. Deutscher Tennis Bund, the Delaware Supreme Court recently found that a provision in a Delaware corporation's bylaws, if drafted for a proper corporate purpose, may provide that the losing party in intra-corporate litigation must pay the winning party's legal fees.1 While the proper corporate purpose determination hinges on the individual circumstances of each case, the court noted that "[t]he intent to deter litigation . . . is not invariably an improper purpose." We bring this opinion to your attention because of the potential planning opportunity it bestows upon corporate boards that have the power to adopt bylaws unilaterally. We also note, however, the conditions and potential drawbacks to such a bylaw provision.

What is a fee-shifting bylaw, and why did the Court find it facially permissible?

A fee-shifting bylaw is simply a provision in a corporation's bylaws that requires the losing party in intra-corporate litigation (such as a suit brought by shareholders against the company) to pay the winning party's legal fees. There can be more nuance to what is considered to be "winning," however. For instance, in ATP, the bylaw provided that the plaintiff would be liable for the defendant's legal fees if the plaintiff did not "obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought."

The ATP Court applied common law principles relating to contracts in finding that the fee-shifting bylaw at issue was not per se invalid. Generally speaking, under the "American Rule," the losing party in a lawsuit is not responsible for the winning party's legal fees. However, states such as Delaware, New York, and New Jersey permit parties to modify this rule by contract, and provide that the loser is responsible for the winner's legal fees.2 Corporate bylaws are considered to be contracts between the shareholders and the corporation. Thus, the ATP Court found the bylaw provision at issue to be no different than any contract clause permitting fee-shifting.

What are the limitations on the Court's ruling?

Just as important is what the Court did not hold, the Court did not make a finding on the issue whether that particular bylaw was permissible under the circumstances of the case at hand. Such an analysis would involve a determination as to whether the bylaw was "adopted by the appropriate corporate procedures and for a proper corporate purpose," a determination that will now have to be made by the court that certified the issue to the Delaware Supreme Court. Thus, the ATP holding does not give directors carte blanche to pass a fee-shifting bylaw in all instances. In particular, directors must remember that in adopting a fee-shifting bylaw, they remain bound by their fiduciary duties to the corporation and shareholders. This means that they cannot adopt a fee-shifting bylaw if doing so would constitute a breach of their duty of loyalty to the corporation and the shareholders.

The Court did, however, provide some guidance on the "proper purpose" question when it noted that "[t]he intent to deter litigation . . . is not invariably an improper purpose." In that statement, the Court appears to be indicating that the general intent of a corporate board to prevent excessive shareholder litigation is not improper. However, the board might cross a line if it passes a fee-shifting bylaw in order to deter a specific lawsuit challenging improper conduct of the directors, or the directors attempt to entrench themselves in office. Such actions could arguably be a breach of the duty of loyalty.

What is the broader significance of the ATP holding?

Though ATP was decided in the context of a tennis-tournament scheduling dispute, it is likely to have its largest impact on mergers-and-acquisition litigation – which often pits dissident shareholders (and their attorneys) against corporate boards. Critics of these lawsuits decry them as often-frivolous actions that force companies to settle with the plaintiffs solely to avoid substantial litigation costs. It is possible that fee-shifting bylaws will serve as a deterrent against inappropriate shareholder litigation.

Does ATP apply to corporations formed in New York or New Jersey?

The ATP holding only applies to Delaware corporations. However, because of the high regard in which the Delaware Supreme Court is held on matters of corporate law, it is possible that a court may apply the reasoning of the ATP opinion even if it is considering an issue under New York or New Jersey law. The law of both of those states contains the same underlying elements as the ATP opinion -- i.e., bylaws must be passed for a proper corporate purpose and fee-shifting by contract is permissible. Accordingly, while no New York or New Jersey court has yet opined on this issue, it is likely that the ATP holding could be persuasive authority in a dispute under New York or New Jersey law.

Can corporations use the ATP holding to their benefit?

In Delaware corporations where boards have the power to adopt bylaws unilaterally, it may very well be that a bylaw provision providing for fee-shifting in the event of unsuccessful shareholder litigation would be upheld (and while there is less certainty, there is still good reason for New York and New Jersey corporations to implement such a bylaw provision). However, before adopting such a bylaw provision, the board must be comfortable that its purposes for passing the bylaw are proper. Additionally, Delaware, New York, and New Jersey law all provide that a majority of shareholders may overturn a bylaw adopted by the board. Thus, if a majority of shareholders are against the bylaw, they could presumably overturn it once it is passed (thus limiting the efficacy of the fee-shifting bylaw). Also, in the case of public companies, it remains to be seen whether proxy advisory firms will react adversely to directors voting in favor of such bylaw provisions.


1 --- A.3d ----, 2014 WL 1847466 (Del., May 8, 2014). While the ATP case involved a non-profit corporation, the holding appears to be equally applicable to for-profit corporations. It should also be noted that the ATP opinion did not address one of the underlying issues in the case, which was whether the fee-shifting bylaw provision could be preempted by federal antitrust law.

2 Mahani v. Edix Media Grp., Inc., 935 A.2d 242, 245 (Del. 2007) (Delaware law); North Bergen Rex Transport, Inc. v. Trailer Leasing Co., 730 A.2d 843, 848 (N.J. 1999) (New Jersey law); Hooper Associates, Ltd. v. AGS Computers, Inc., 548 N.E.2d 903, 904 (N.Y. 1989) (New York law).

P>The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
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
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions