Delaware Supreme Court Finds Fee-Shifting Bylaw Permissible

In a recent en banc decision that could help stem the tide of intra-corporate stockholder litigation involving Delaware corporations and blunt criticism of the Delaware courts' failure to discourage the obligatory class action filed against every merger, the Delaware Supreme Court has unanimously upheld the validity of a bylaw adopted by a Delaware non-stock corporation providing that an unsuccessful plaintiff in intra-corporate litigation (e.g., suits alleging breaches of fiduciary duties, derivative suits, claims arising under the General Corporation Law of the State of Delaware (DGCL), and other internal affairs claims brought by stockholders) would be required to pay the defendants' attorneys fees and expenses.1 The Court further held that the enforceability of a specific fee-shifting bylaw would depend on the circumstances surrounding its adoption and use, and that if such a bylaw were adopted for an improper purpose it would be unenforceable. The Court specifically stated that a board's intent to deter litigation would not necessarily be deemed an improper purpose.

Although the case involved a Delaware non-stock corporation, as discussed below, public and private Delaware stock corporations will find the decision relevant.

Opinion

Background. The underlying case involved an intra-corporate dispute involving a Delaware non-stock membership corporation, not a typical Delaware stock corporation. Two members of the ATP Tour, a global tennis organization (ATP), sued ATP and certain of its board members alleging both federal antitrust and Delaware fiduciary duty claims. The members' claims were unsuccessful and, as a result, ATP subsequently sought to recover its legal fees, costs and expenses based on its fee-shifting bylaw.2

Certified questions of law for the Delaware Supreme Court. The Delaware Supreme Court's opinion was issued in response to four certified questions of law submitted by a Delaware federal district court that had determined the validity of the ATP fee-shifting bylaw was an open question under Delaware law.

Fee-shifting bylaws are permissible under Delaware law, but their enforceability depends upon the circumstances surrounding their adoption and use. The Court held that the adoption of a fee-shifting bylaw by a Delaware non-stock corporation is facially valid since it was not prohibited by the DGCL or any other Delaware statute or common law. The Court noted that bylaws are "contracts among a corporation's shareholders,"3 and that a validly-enacted fee-shifting bylaw falls within the settled contractual exception to the "American Rule" requiring parties to bear their own attorneys' fees and expenses absent a statute or contract to the...