Fee Shifting in Non-Stock Corp's Bylaws Are Valid and Enforceable

It's not every day that a district court certifies questions of law for a state's highest court, but the District Court for the District of Delaware certified not one, but four questions of law seeking guidance from the Supreme Court of Delaware.

All the questions had to do with fee shifting in a non-stock corporations bylaws: whether and under what circumstances a fee shifting provision is valid, whether such a provision is valid if adopted to deter litigation, and whether the provision is enforceable against someone who became a member before its adoption.

Since most companies are incorporated in Delaware, we thought you'd want to know. Read on to see what the Supreme Court of Delaware concluded.

Background & Procedural History

A member corporation that operates men's professional tennis tours was sued by some of its members because of disagreements over changes to tournaments. The members alleged breach of fiduciary duty under Delaware law, and violations of federal antitrust law. After a jury trial, the members lost on all of their claims.

The corporation then sought fees and costs based on the corporation's bylaws, which were amended in 2006. In relevant part, the amendments to the bylaws provides for fee shifting, in intra-corporate disputes, when the members do "not obtain a judgment on the merits."

The district court held that where antitrust claims are involved, fee shifting agreements are preempted by federal law. On appeal, the Third Circuit vacated the order, and held that before reaching the preemption question, the district court should have determined whether the fee shifting amendment was enforceable as a matter of Delaware law.

On remand, the district court certified questions of law for the Supreme Court of Delaware to answer.

Fee Shifting Valid, in Theory

Discussing the questions of law in the abstract, the court held that, "Under 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." In this particular case, the court did not have sufficient facts to decide whether this particular amendment was enforceable, and the court noted that "an intent to deter litigation would not necessarily render the bylaw unenforceable in equity."

While this decision is limited to member corporations, the Supreme Court of Delaware clarifies that bylaws incorporating fee shifting, so long as they are adopted properly, can be enforceable. This decision could definitely have an outcome on the future likelihood of shareholder litigation, but whether it will actually have an effect, we'll have to wait and see.

Related Resources:

• Delaware Supreme Court Adopts New Standard of Review for Buyouts (FindLaw's U.S. Third Circuit Blog)
• Delaware Chancery Court Petitions for Cert Review of 3rd Cir. Decision (FindLaw's U.S. Third Circuit Blog)
• Public Has 1st Amend. Right to Access Del. Chancery Arbitrations (FindLaw's U.S. Third Circuit Blog)