Fee Shifting Corporate Bylaws

In the past few weeks ATP Tour, Inc. v. Deutscher Tennis Bund (2014 WL 1847446) has received considerable attention. The decision addressed the novel question of whether fee-shifting provisions are valid and enforceable under Delaware General Corporation Law. In 2006, ATP amended the bylaws to include a provision shifting liability for litigation costs in any unsuccessful action to the losing party when brought against the company by a member, owner, or other claiming party. Soon after the board was unsuccessfully sued by two members. ATP then moved for costs and was denied. Upon appeal and remand, the district court certified the question to the Delaware Supreme Court.

The court answered that fee-shifting provisions are facially valid. The court held that a fee-shifting bylaw is facially valid if authorized by Delaware General Corporation Law, consistent with the respective certificate of incorporation, and not otherwise prohibited. The court found that neither DGCL nor common law prohibited fee-shifting arrangements while ATP’s corporate charter permitted them. Although fee-shifting provisions are facially valid, the court stated they could be unenforceable if adopted for an improper purpose. The court did not address the subjective validity of ATP’s bylaw but held fee-shifting bylaws to be facially valid.

In response to the decision, many comments have discussed the validity of a fee shifting provision in other states. In examining relevant law in California, it seems likely that a fee-shifting provision would be valid under California law. Under Cal. Corp. Code §§204 and 212, a corporation can include, in either the articles of incorporation or bylaws, “any provision not in conflict with law, for the management of the business and… the conduct of the affairs of the corporation.” In addition, Cal. Civ. Code §1021 allows parties by contract to provide for attorneys' fees to the prevailing party. A California court could, however, find such a provision contrary to public policy regardless of Delaware holding otherwise.

Finally, a bill (S. Bill #236) has already been introduced into the Delaware Senate to limit the decision's effect. The intent stated behind the bill is to “narrowly limit the application of the decision to non-stock corporations.” However, the language of the proposed law states differently: the provisions are valid in a certificate of incorporation if the shareholder provides explicit affirmative consent.  If a California court upheld such a bylaw provision, the California Legislature might similarly attempt to narrow its effect.

Accordingly, it is too early to know whether this decision will have far-reaching effects.  In all events, it bears watching.