ATP TOUR, INC., Etienne De Villiers, Charles Pasarell, Graham Pearce, Jacco Eltingh, PerryRogers, and Iggy Jovanovic, Appellants, v. DEUTSCHER TENNIS BUND (German Tennis Federation), Rothenbaum Sport GmbH, and Qatar Tennis Federation, Appellees. Supreme Court of Delaware, May 8, 2014
The general rule in the United States is that each party pay its own legal fees and costs unless there is a contract or statute that provides otherwise. The “American Rule” as this is known is prevalent throughout courts and arbitrations in all 50 states. The Delaware was asked to decide whether a bylaw making dissident shareholders pay legal fees when they lose violated public policy. The court said it did not unless it was being used for an inequitable purpose. It did not matter that the bylaw was completely one-sided. It did not make the corporation liable for the dissident shareholders’ legal fees if the corporation lost the case.
Excerpts from the decision:
A fee-shifting bylaw, like the one described in the first certified question, is facially valid. Neither the DGCL nor any other Delaware statute forbids the enactment of fee-shifting bylaws. A bylaw that allocates risk among parties in intracorporate litigation would also appear to satisfy the DGCL’s requirement that bylaws must “relat[e] to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees.” The corporate charter could permit fee-shifting provisions, either explicitly or implicitly by silence. Moreover, no principle of common law prohibits directors from enacting fee-shifting bylaws.
The third certified question asks whether the bylaw is “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.” Again, we are unable to respond fully. Legally permissible bylaws adopted for an improper purpose are unenforceable in equity. The intent to deter litigation, however, is not invariably an improper purpose. Fee-shifting provisions, by their nature, deter litigation. Because fee-shifting provisions are not per se invalid, an intent to deter litigation would not necessarily render the bylaw unenforceable in equity.
The fourth certified question asks whether a fee-shifting bylaw provision is enforceable against members who joined the corporation before the provision’s enactment and who agreed to be bound by rules “that may be adopted and/or amended from time to time” by the board. Assuming the provision is otherwise valid and enforceable, as a statutory matter the answer is yes. The DGCL permits a corporation to, “in its certificate of incorporation, confer the power to adopt, amend or repeal bylaws upon the directors.” If directors are so authorized, “stockholders will be bound by bylaws adopted unilaterally by their boards.