On May 8, 2014, the Delaware Supreme Court issued a decision in ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A.3d 554 (Del. 2014), holding that a bylaw provision of a non-stock corporation shifting attorneys' fees and costs to unsuccessful plaintiffs in intra-corporate lawsuits was valid and enforceable under certain circumstances. The court found such bylaws permissible under Delaware's statutes when a plaintiff "does not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought." Id. at 557. The Court did note that the enforceability of a fee-shifting bylaw depends on the manner in which it was adopted and the circumstances under which it was invoked. The Court said that it is "able to say only that a bylaw of the type at issue here is facially valid, in the sense that it is permissible under [Delaware's statutes], and that it may be enforceable if adopted by the appropriate corporate procedures and for a proper corporate purpose." Id. at 559.
This ruling generally upholds the facial validity of fee-shifting bylaws, and the Court's rationale seems to be equally applicable to stock corporations as well as to non-stock corporations. (Non-stock corporations are similar to limited liability companies, in that non-stock corporations are owned by members and not stockholders. Non-stock corporations are used primarily by non-profit entities.) As a result, this decision prompted discussion among businesses and attorneys alike, speculating whether to adopt such a provision in stock corporation bylaws along with other corporation-friendly bylaws, such as forum selection bylaws designating specific forums for shareholder disputes. As quickly as those talks began, the Delaware General Assembly scrambled to put together proposed legislation to restrict such fee-shifting bylaws to non-stock corporations.
Approximately a month after the proposed legislation was presented, it was withdrawn to allow a further study of the possible benefits and harm of using fee-shifting bylaws in stock corporations. The Delaware General Assembly likely will take up the issue again in 2015. In the meantime, the Delaware Supreme Court might get another look at this developing area of the law. A few stock corporations already have attempted to retroactively amend their bylaws with similar fee-shifting provisions, which might provide the Delaware Supreme Court with the opportunity to consider the issue with respect to stock corporations.
Whether or not directors of Delaware corporations should adopt a fee-shifting bylaw now before the Delaware General Assembly or the Delaware courts clarify the issue is a thorny question. Boards will need to consider specific company needs, the risk the company will be forced to revise bylaws yet again after any statutory amendments, likely investor opposition, and litigation risks.