Delaware Law Update: Fee-Shifting Bylaw Provisions And The Use Of A Poison Pill In Response To Activist Investor Activities

ATP Tour, Inc. - Fee-Shifting Corporate Bylaws. The Delaware Supreme Court issued a decision holding that a non-stock corporation could adopt a fee-shifting bylaw provision, in effect implementing a "loser pays" arrangement for intra-corporate litigation.1 Not long after the decision was issued, legislation was introduced in the Delaware General Assembly that would have limited the decision's impact to non-stock entities. However, that legislation has not been passed and instead the Delaware General Assembly passed a resolution calling for further study of the potential impact of fee-shifting bylaw provisions, and recommending potential legislation to address the balance between discouraging meritless litigation without unduly restricting stockholder attempts to vindicate legitimate interests in court. While awaiting consideration by the Delaware legislature, corporations and their counsel will assess whether and how fee-shifting bylaws might be implemented with respect to stock corporations.

ATP Tour Inc., a Delaware membership corporation that operates a global men's tennis tour, adopted a bylaw requiring a member who brings suit against ATP or other members to pay the attorneys' fees and litigation costs of defendants unless the suing member obtains a judgment for substantially all of whatever the suing member initially demanded. After certain members brought suit challenging changes to ATP's tennis tour schedule and lost their suit in federal court, ATP attempted to enforce the fee-shifting provisions of the bylaws, seeking attorneys' fees and other costs from the plaintiffs.

The federal court issued certified questions to the Delaware Supreme Court related to the enforceability of the fee-shifting bylaw. The Delaware Supreme Court held that a fee-shifting bylaw is permissible as a matter of Delaware law and the bylaw before the court was "facially valid" in that it complied with the Delaware General Corporation Law and was not otherwise prohibited. The court added that the enforceability of any specific bylaw, including ATP's bylaw, would depend in part on the manner in which the bylaw was adopted and invoked. Even where it is within a corporation's power to adopt a bylaw, it may be invalid if adopted or applied for an inequitable purpose. The court did not reach that issue with respect to the specific bylaw before it and left the issue to be decided by the federal district court.

The ATP decision was widely discussed and many...