Supreme Court Upholds Facial Validity of Fee-Shifting Bylaw Adopted by Nonstock Corporation

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In ATP Tour, Inc. v. Deutscher Tennis Bund, issued on May 8, 2014, the Delaware Supreme Court upheld the facial validity of a bylaw requiring an unsuccessful plaintiff in corporate litigation to reimburse the corporation for its litigation expenses if the plaintiff fails to obtain a judgment on the merits of its claim.

The case arose under unusual circumstances: the corporation was a nonstock “membership” corporation, rather than a typical Delaware stock corporation, and the opinion was in response to questions certified to the Delaware Supreme Court by a federal district court. In the underlying federal case, two tennis federations, which were “members” of ATP, the international tennis association, brought antitrust and fiduciary duty claims against ATP. After the federations lost on the merits of those claims, ATP sued to recover its expenses under a fee-shifting bylaw unilaterally adopted by the ATP board after the federations had joined ATP, but before the events giving rise to the lawsuit. The federal court certified four questions to the Delaware Supreme Court, each related to the enforceability of the fee-shifting bylaw.

Because of the nature of the certification process, the Delaware Supreme Court did not have a typical factual record before it and, indeed, stated that its opinion did not even directly address the particular bylaw at issue (as opposed to the pure legal questions certified to it). With that caveat, the Delaware Supreme Court held that, as a matter of law, “fee-shifting provisions in a non-stock corporation’s bylaws can be valid and enforceable under Delaware law.” The Court went on to state that “[n]either the DGCL nor any other Delaware statute forbids the enactment of fee-shifting bylaws” and that “a fee-shifting provision contained [within] a validly-enacted bylaw . . . would not be prohibited under Delaware common law.”

The Court also made clear that the enforcement of a facially valid bylaw depends on the “manner in which it was adopted and the circumstances under which it was invoked,” and that bylaws that “may otherwise be facially valid will not be enforced if adopted or used for an inequitable purpose.” In this regard, the Court also observed, “[t]he intent to deter litigation . . . is not invariably an improper purpose” and that “an intent to deter litigation would not necessarily render the bylaw unenforceable in equity.” Again, however, the Court declined to provide further guidance due to the absence of a sufficient factual record. Finally, the Delaware Supreme Court held that the federations were bound by unilateral, board-adopted bylaws even after they joined ATP because ATP’s charter conferred that authority on the board.

Although the ATP opinion is based on statutory provisions and common law principles applicable to stock and nonstock corporations alike, given the unusual facts and procedural context, the scope of the opinion’s holdings - and, importantly, the enforceability of such a bylaw as to stock corporations, either “facially” or in any particular circumstances - is as yet unclear. See, e.g., 8 Del. C. § 102(a)(4) (providing “conditions of membership” of a nonstock corporation may be stated in the bylaws).

Copyright © Morris, Nichols, Arsht & Tunnell LLP. This update provides general information and should not be used or taken as legal advice for specific situations, which depend on the evaluation of discussion; please contact any member of Morris Nichols Corporate Counseling Group.

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