Questions regarding the uncertain future of corporate fee-shifting bylaws could soon be answered by the Delaware legislature, as yesterday the Corporation Law Section of the Delaware State Bar Association voted to propose legislation intended to limit the scope of a recent state Supreme Court decision holding fee-shifting bylaws permissible under Delaware law. Although the opinion in ATP Tour, Inc. v. Deutscher Tennis Bund, No. 534,2013, 2014 WL 1847446 (Delaware May 8, 2014) involved non-stock corporations, commentators have suggested the Court’s reasoning could extend broadly to Delaware stock corporations, which could use fee-shifting bylaws to deter costly stockholder litigation. Without waiting for the court to decide this issue, the proposed legislation would amend the Delaware General Corporation Law (“DGCL”) to prevent stock corporations from imposing fee-shifting provisions or other monetary liabilities on stockholders through corporate charters or bylaws.
ATP Tour Decision, Reaction and Proposed Legislation.
In ATP Tour, the Delaware Supreme Court was asked whether directors of a non-stock corporation could lawfully adopt a bylaw provision shifting litigation costs to the losing party in the context of disputes between the corporation and its members. The Delaware Supreme Court concluded generally that fee-shifting provisions in a non-stock corporation’s bylaws can be valid and enforceable under Delaware law, finding no reason under the DGCL, any other Delaware statute, or common law, to prevent parties from contractually modifying the typical rule which requires parties to pay their own attorneys’ fees and costs. Although the Court held that a fee-shifting provision must be properly adopted and used for a proper purpose to be enforced, it reasoned that the intent to deter litigation was not an inherently improper purpose. Click here to read the full ATP Tour opinion.
The ATP Tour decision has generated substantial attention from the media and legal community regarding the potential implications for Delaware corporate law generally and stockholder litigation more specifically. Although ATP Tour involved the enforceability of fee-shifting provisions in bylaws of non-stock corporations, commentators have suggested that the Court’s reasoning is applicable more broadly to Delaware corporations. If true, stock corporations could lawfully include fee-shifting provisions in their bylaws, which could result in a decrease in the number of suits filed by stockholders. Given the substantial and growing volume of stockholder litigation in Delaware in recent years, this reading of ATP Tour could have an immediate impact on the future landscape of corporate litigation.
Responding to the attention given to the ATP Tour decision, and in an effort to curb the potential implications of the decision on shareholder liabilities, the Council of the Corporation Law Section of the Delaware State Bar Association drafted an amendment to the
DGCL precluding fee-shifting bylaws from stock corporations’ governing documents. The amendment would clarify that, except as otherwise permitted by statute, “neither the certificate of incorporation nor the bylaws of any [stock] corporation may impose monetary liability, or responsibility for any debts of the corporation, on any stockholder.” This amendment would resolve any uncertainty about the application of ATP Tour to Delaware stock corporations by creating a statutory prohibition on fee-shifting bylaws. On May 29, 2014, members of the Corporation Law Section approved the language of the recommended amendment, which will next be proposed to the Delaware legislature. If enacted as drafted, the amendment would become effective as of August 1, 2014.
The ATP Tour opinion and the proposed legislation have sparked a broader discussion about the proper purpose of fee-shifting provisions and the role of stockholder litigation. If enacted, the proposed legislation will limit Delaware stock corporations from introducing fee-shifting provisions into their corporate charters and bylaws, but it will not fully resolve these broader questions or address the potential for fee-shifting bylaws under the laws of other states.
If you have questions about fee-shifting provisions, the opinion and proposed legislation discussed in this alert or other corporate governance issues, please contact the Womble Carlyle attorney with whom you usually work or one of our Corporate and Securities attorneys.
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