By David Bernstein and Elise Gabriel
In ATP Tour, Inc., the Delaware Supreme Court responded to certified questions from the United States District Court for the District of Delaware regarding the validity of a fee-shifting provision in a Delaware non-stock corporation’s bylaws. The bylaw at issue provides that any member that asserts a claim against the corporation or another member and does not “substantially achieve, in substance and amount, the full remedy sought” will be obligated to reimburse the corporation or the member for all fees, costs and expenses, including reasonable attorneys’ fees and other litigation expenses. The Supreme Court answered, in relevant part, that such a fee-shifting provision is authorized by the Delaware General Corporation Law (“DGCL”), and therefore is facially valid, but whether it would be enforceable depends on the circumstances under which it is adopted and under which it is invoked. The Delaware Supreme Court stated that bylaws that otherwise may be facially valid will not be enforced if adopted or used for an inequitable purpose.
Here, two members of ATP Tour, Inc. (“ATP”), a Delaware membership corporation operating a professional tennis tour, had unsuccessfully sued ATP for breach of fiduciary duty and antitrust violations. ATP then moved to recover its costs and attorneys’ fees pursuant to the bylaw provision described above. The Federal District Court, in which the suit had been brought, found the issue of enforceability of a fee-shifting bylaw to be novel and certified four questions regarding its validity and its enforceability to the Delaware Supreme Court. After stating that the bylaw provision was facially valid, the Delaware Supreme Court found that it could not answer the questions regarding enforceability because they depended on the circumstances under which the bylaw was adopted and was being invoked, which were not before the Supreme Court. The fourth question was whether the bylaw could be enforced against a party that became a member before the bylaw was adopted. The Delaware Supreme Court answered this in the affirmative because the member had agreed to be bound by rules that may be adopted or amended from time to time.
Although ATP was a non-stock membership corporation, the decision was based on provisions of the DGCL that apply to all corporations, and there is no reason to think the decision would have been different if ATP had been a stock corporation.
ATP Tour, Inc. v. Deutscher Tennis Bund