The United States District Court for the District of Delaware (“District Court”) recently certified four questions of law to the Delaware Supreme Court regarding the validity of a fee-shifting provision in a Delaware non-stock corporation’s bylaws. Specifically, the questions certified for consideration in were:
1. May the Board of a Delaware non-stock corporation lawfully adopt a bylaw (i) that applies in the event that a member brings a claim against another member, a member sues the corporation, or the corporation sues a member (ii) pursuant to which the claimant is obligated to pay for “all fees, costs, and expenses of every kind and description (including, but not limited to, all reasonable attorneys’ fees and other litigation expenses)” of the party against which the claim is made in the event that the claimant “does not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought”?
2. May such a bylaw be lawfully enforced against a member that obtains no relief at all on its claims against the corporation, even if the bylaw might be unenforceable in a different situation where the member obtains some relief?
3. Is such a bylaw rendered unenforceable as a matter of law if one or more Board members subjectively intended the adoption of the bylaw to deter legal challenges by members to other potential corporate action then under consideration?
4. Is such a bylaw enforceable against a member if it was adopted after the member had joined the corporation, but where the member had agreed to be bound by the corporation’s rules “that may be adopted and/or amended from time to time” by the corporation’s Board, and where the member was a member at the time that it commenced the lawsuit against the corporation?
The answers recently issued in ATP Tour v. Deutscher Tennis Bund et al, Del. Supr., No. 534, 2013 (May 8, 2014), address each of these questions in order. Examining each question, the Delaware Supreme Court concluded that “[u]nder Delaware law, a fee-shifting bylaw is not invalid per se, and the fact that it was adopted after entities became members will not affect its enforceability.” Id. at 14. The Court was mindful, however, that whether the specific bylaw in question is enforceable depends on the manner in which it was adopted and the circumstances through which it was invoked. Id. at 10. Certifications, by their very nature, address only questions of law. Therefore, with regard to the provision at issue in ATP, the Supreme Court concluded “only that a bylaw of the type at issue here is facially valid, in the sense that it is permissible under the DGCL, and that it may be enforceable if adopted by the appropriate corporate procedures and for a proper corporate purpose.”
The answers may be read in their entirety here.