Here’s one to keep an eye on. Just last week, the Delaware Supreme Court (ATP Tour, Inc. v. Deutscher Tennis Bund) held that fee-shifting provisions in a corporation’s bylaws are facially valid and enforceable against stockholder plaintiffs under Delaware corporate law. This ruling has the potential to tilt the balance of stockholder litigation significantly in favor of Delaware corporate defendants.
What is a fee-shifting bylaw?
Fee-shifting bylaws are a novel concept, so there is not yet much precedent to go on. In the ATP case, the bylaw provided that
if a member asserted any claim against ATP (a non-stock corporation that operates a global professional men’s tennis tour), other members or certain affiliates and the asserting member “does not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought,”
then the asserting member must reimburse the fees, costs and expenses incurred by ATP and such other defendants in defending the claim.
Is this relevant to Delaware stock corporations?
Amazingly, the answer is yes. The Court specifically stated that such a bylaw is consistent with and facially valid under the Delaware General Corporation Law, although enforceability “may turn on the circumstances surrounding its adoption and use,” potentially precluding enforceability if the bylaw was adopted for “improper purposes.” As you might guess, the Court provided little guidance as to what “improper purposes” might encompass. It did, however, say that a bylaw would not necessarily be unenforceable because it was adopted with “the intent to deter litigation.”
What does this mean for most companies?
Fee-shifting bylaws could quickly become a potent deterrent against the kind of cookie-cutter stockholder class action suits that have plagued nearly every public company merger transaction, as well as various other categories of strike suits, over the years.
- Because this is a new concept, a board’s adoption of fee-shifting bylaws could be challenged by an aggressive plaintiff as a breach of its fiduciary duty of loyalty. Therefore, it is important that the process for considering and adopting such a bylaw be thorough and conducted with an eye toward warding off that type of claim.
- It is possible (if not likely) that stockholder advisory firms and institutional investors will take a negative view of fee-shifting bylaws. Companies should consider the possible impact on stockholder relationships and governance scores.
- The “improper purposes” carve-out in the ATP decision creates some ambiguity about enforceability. Even so, it seems clear that a company is better off with a properly considered and adopted fee-shifting bylaw than without.
- It is very much an open question as to whether other jurisdictions will enforce fee-shifting bylaws. This makes consideration of a Delaware forum-selection bylaw (see this Doug’s Note) all the more relevant.
I am expecting this to be on every public company’s governance radar in the near future. In fact, it would be an excellent topic for discussion at an upcoming governance committee or full board meeting. It also bears close attention as companies and perhaps other jurisdictions react in the coming months.