Delaware Supreme Court Approves Fee-Shifting Bylaw for Non-Stock Corporations

In its May 8, 2014 decision in ATP Tour, Inc. v. Deutscher Tennis Bund, No. 534, 2013, --- A.3d ----, 2014 WL 1847446 (Del. May 8, 2014), the Delaware Supreme Court may have opened the door to the adoption by Delaware corporations of a bylaw provision that shifts litigation expenses to shareholders when they bring, and lose, intra-corporate litigation claims against the corporation and its directors and officers.

The adoption of such a bylaw provision should now be carefully considered by the Boards of Directors of Delaware corporations as a way to manage litigation risks.

What Does A Fee-Shifting Bylaw Provide?

In 2006, the Board of ATP Tour, Inc. ("ATP"), a Delaware non-stock membership corporation that operates a global professional men's tennis tour ("the Tour"), adopted the fee-shifting bylaw provision. ATP's Bylaw Article 23.3(a) provides, in relevant part as follows:

In the event that (i) any [current or prior member or Owner or anyone on their behalf ("Claiming Party")] initiates or asserts any [claim or counterclaim ("Claim")] or joins, offers substantial assistance to or has a direct financial interest in any Claim against the League or any member or Owner (including any Claim purportedly filed on behalf of the League or any member), and (ii) the Claiming Party (or the third party that received substantial assistance from the Claiming Party or in whose Claim the Claiming Party had a direct financial interest) does not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought, then each Claiming Party shall be obligated jointly and severally to reimburse the League and any such member or Owner for all fees, costs and expenses of every kind and description (including, but not limited to, all reasonable attorneys' fees and other litigation expenses) (collectively, "Litigation Costs") that the parties may incur in connection with such Claim.

The fee-shifting provision was challenged in a lawsuit brought in the United States District Court for the District of Delaware by two Federation members of ATP, who sued ATP and six of its board members. The underlying lawsuit asserted federal antitrust claims and Delaware breach of fiduciary duty claims arising out of changes made by the ATP Board in 2007 to the Tour schedule and format.

After a 10-day jury trial, plaintiffs failed to prevail on any of their claims. ATP then moved for recovery of its attorneys' fees under Bylaw Article 23.3(a)...