On May 8, 2014, the Delaware Supreme Court ruled that the board of a Delaware non-stock corporation can, for a proper purpose, adopt a fee-shifting by-law that requires a plaintiff-stockholder to pay the corporation's legal expenses if the plaintiff loses on a claim it has brought against the corporation (ATP Tour, Inc., et al. v. Deutscher Tennis Bund, et al., No. 534, 2013, (Del. May 8, 2014)). Because Section 114 of the Delaware General Corporation Law (DGCL) applies the statute to non-stock corporations, the ruling can be presumed to apply equally to ordinary, stock-issuing Delaware corporations. The Supreme Court added that a fee-shifting by-law would apply equally to all members of the non-stock corporation, including those who were members before the by-law was adopted.

The issue came to the Delaware Supreme Court on certification of questions of law from the federal District Court for the District of Delaware. The underlying case involved a suit brought against ATP Tour Inc., the operator of the global men's professional tennis tour, by two of its member tennis federations. ATP is organized as a Delaware membership corporation, which does not issue stock. The two plaintiff-appellees joined ATP in the early 1990s and agreed to be bound by ATP's by-laws as they may be amended from time to time. In 2006, ATP's board unanimously amended the by-laws to add a fee-shifting provision that shifts the fees, costs and expenses of an intra-corporate litigation to the plaintiff if the plaintiff "does not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought." This amendment modified the traditional "American Rule," which provides that litigants are responsible for their own attorney expenses (see Fed. R. Civ. P. 54(d)) and which Delaware follows (Chrysler Corp. v. Dann, 223 A.2d 384, 386 (Del. 1966)).

The next year, the board decided to change its tour schedule and format, which resulted in the plaintiffs' tournament being downgraded from ATP's highest tier to its second highest. The plaintiffs sued ATP and six of its seven board members in the Delaware District Court, alleging federal antitrust and Delaware fiduciary duty claims.

The District Court granted ATP's and the directors' motion for judgment as a matter of law on the fiduciary duty claims and on the antitrust claims as against the directors. The jury found in favor of ATP on the remaining antitrust claims. ATP then sought reimbursement for its legal fees, costs and expenses under its by-laws' fee-shifting provision. The District Court denied the motion, finding that the provision was preempted by federal law because the claims involved antitrust claims. ATP appealed to the US Court of Appeals for the Third Circuit. The Third Circuit vacated the District Court's order because the District Court did not first decide whether the fee-shifting by-law was enforceable before turning to the federal preemption question. On remand, the District Court determined that the enforceability of the fee-shifting provision was a novel question of Delaware law and certified the following four questions of law to the Delaware Supreme Court:

The court first determined that the DGCL applies equally to non-stock corporations under Section 114 of the DGCL. On that basis, the court ruled that fee-shifting by-laws are facially valid, if adopted properly and for a proper purpose, because:

The court could not comment specifically on whether ATP's by-law itself was enforceable because it did not have the facts necessary to determine whether the by-law was enacted for a proper purpose or properly applied. However, if both conditions were met, the court held that the by-law would be enforceable against a plaintiff who did not succeed on any claims. The court added that the adoption of a fee-shifting by-law to deter legal challenges is not a per se invalid purpose, even though fee-shifting provisions inherently deter litigation.

Finally, the court also held that a valid and enforceable fee-shifting by-law is enforceable against all members, including members who joined before the by-law was enacted. In support of this holding, the court cited Boilermakers Local 154 Retirement Fund v. Chevron Corporation, the Court of Chancery's decision that upheld forum-selection by-laws, for the principle that "stockholders will be bound by by-laws adopted unilaterally by their boards" if the directors are permitted to do so (73 A.3d 934, 956 (Del. Ch. 2013)).

The practical implications of the ATP decision are potentially enormous. By confirming the facial validity of fee-shifting by-laws, the Delaware Supreme Court has handed Delaware corporations a powerful corporate-governance tool for stemming the tide of rote class-action suits brought over nearly every public M&A deal. The Delaware judiciary has recently addressed this proliferation of litigation in several ways, including by upholding forum-selection by-laws and rejecting disclosure-only settlements (for an example of the latter, see Legal Update, In re Medicis: Chancery Court Rejects Settlement Based on Disclosures That Only Reinforced Target Board's Merger Recommendation). A fee-shifting by-law could be an even stronger deterrent against frivolous lawsuits, because the risk of losing is borne entirely by the plaintiff.

The decision also strongly suggests that the Delaware Supreme Court would uphold a unilaterally adopted forum-selection by-law were that issue brought before it. The Delaware Supreme Court never ruled on Chevron because the plaintiffs dropped their appeal of the Court of Chancery's decision. However, the Delaware Supreme Court's reference to Chevron in its ATP decision for the principle that unilaterally adopted by-laws apply equally against prior stockholders suggests that it would uphold a forum-selection by-law if given the chance (for more on Chevron and forum-selection clauses, see Legal Update, Delaware Court of Chancery Upholds Boards' Unilaterally Adopted Forum Selection By-laws).

Although the court has authorized the unilateral adoption of fee-shifting by-laws, boards of public companies should also weigh the possibility that proxy-advisory firms will likely disapprove that course of action. Firms such as ISS and Glass Lewis favor stockholder votes on forum-selection by-laws and have taken the position that they will make recommendations on those votes on a case-by-case basis, taking into account the company's other corporate-governance practices. It would not be surprising to see these firms take firmer stances on fee-shifting by-laws because of their potentially stronger deterrence effect.