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8 | Monday, august 11, 2014 | Commercial Litigation
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legal fees and expenses under a Tour bylaw

By wiLLiam J. SuShon, providing that a Tour member that unsuc-
Shifting Sands:
Samantha a. BrutLag cessfully sued another member or the Tour
anD eDwarD n. moSS
must reimburse the defendant’s reasonable
D attorneys’ fees. Deutscher Tennis Bund v. ATP
elaware state courts have been increas- Tour, No. 07-178, 2009 wL 3367041, at **1-2
ingly skeptical of shareholder litigation (D. Del. Oct. 19, 2009). The court denied ATP’s
Practical Advice
designed to achieve quick settlements
motion, expressing concern that such fee-
in which the shareholder class receives shifting would be contrary to Congress’ intent
enhanced disclosure (which is often little to encourage private antitrust enforcement

more than cosmetic), defendants receive a by chilling meritorious litigation. Id. at *4.
On Delaware
release (usually from claims that had little or The Third Circuit vacated that decision
no chance of success), and plaintiffs’ attor- because the district court had effectively held
neys receive an agreed-to fee award. In May, that “federal law preempts the enforcement of
the Delaware Supreme Court gave Delaware fee-shifting arrangements” without first con-
corporations another arrow in their quiver for sidering the threshold question—whether the
Fee-Shifting Bylaws
fighting shareholder litigation. In ATP Tour v. bylaw was enforceable as a matter of Dela-
Deutscher Tennis Bund (German Tennis Fed- ware law. Deutscher Tennis Bund v. ATP Tour,
eration), 91 A.3d 554 (Del. 2014) (en banc), the 480 Fed.Appx. 124, 126-28 (3d Cir. 2012). On

court upheld a non-stock corporation’s bylaw remand, the district court certified the Dela-
requiring unsuccessful plaintiffs to pay the ware-law question to the Delaware Supreme
defendant’s attorneys’ fees in intra-corporate Court. Deutscher Tennis Bund v. ATP Tour,
‘ATP’ fundamentally alters playing field for litigation. Such a fee-shifting provision could No. 07-178, 2013 wL 4478033, at *1 (D. Del.
deter many shareholder suits—especially Aug. 20, 2013).
shareholder litigation.
suits that are brought without regard to the The Delaware Supreme Court unanimously
likelihood of ultimate success on the merits held that the Tour’s fee-shifting bylaw was
and solely with an eye toward extracting a facially valid under Delaware law. ATP Tour, 91

settlement.
A.3d at 558. The court explained that bylaws
Because this decision fundamentally are nothing more than contracts among a cor-
alters the playing field for Delaware share- poration’s shareholders, and contracting par-
holder litigation, the Delaware General ties can modify the “American rule.” Id. The
Assembly is considering an amendment court noted, however, that whether a specific
to the Delaware General Corporation Law fee-shifting bylaw is enforceable “depends on
(DGCL) that would limit ATP Tour’s applica- the manner in which it was adopted and the
bility to non-stock corporations only. That circumstances under which it was invoked.”
proposed amendment has itself proven Id. It further explained that “[b]ylaws that may

controversial; the vote has already been otherwise be facially valid will not be enforced if
postponed on multiple occasions and has adopted or used for an inequitable purpose.” Id.
now been delayed until early next year.1
Absent passage of that bill, stock corpora- Application of ‘ATP’ to Stock Corporations
tions should be free to enact fee-shifting
bylaws. But how corporations go about it The Delaware Supreme Court’s decision
could be critical to withstanding scrutiny did not explicitly address whether its holding
in subsequent shareholder litigation.
concerning a non-stock corporation would

extend to the more common stock corpora-
Increasing Criticism of Shareholder Litigation
tion form. Non-stock corporations differ from
traditional stock corporations in that they
ATP represents the crest of Delaware have members instead of shareholders and
courts’ recent hostility toward certain are not authorized to issue capital stock.3 But
shareholder litigation. In recent years, these should be distinctions without a differ-
several decisions have criticized what ence for purposes of ATP’s holding.
have come to be known as “peppercorn ATP’s reasoning confirms this view. The
settlements.” Such settlements typically opinion’s lynchpin is DGCL §109(b), which

involve a shareholder challenge to a pend- provides that bylaws are permissible so
ing merger or acquisition as a breach of long as they “relat[e] to the business of the CK
the directors’ fiduciary duties. But rather corporation, the conduct of its affairs, and STO
than taking the case through a hearing to its rights or powers or the rights or pow- BIG
determine whether the transaction should ers of its stockholders, directors, officers, or
be allowed to proceed, the parties reach employees.” In a footnote, the court made
a quick settlement in which the plaintiffs going-private proposals” in which plaintiffs’ v. Purches, No. 7199-VCG, 2012 wL 4503174, clear that under DGCL §114, all DGCL provi-
release their claims on behalf of a share- lawyers win “sizable fees ... by settling at at *5 (Del. Ch. Oct. 1, 2012).
sions that spoke in terms of stockholders
holder class in exchange for enhanced dis- the same level that the special committee apply equally to non-stock corporations.

closure in the SeC filings seeking approval achieved.” In re Cox Commc’ns S’holders The Decision in ‘ATP’
ATP Tour, 91 A.3d at 557 n.10. And the court
for the transaction and a six-figure or more Litig., 879 A.2d 604, 605-06 (Del. 2005). Vice relied interchangeably on opinions address-
attorneys’ fee award.2 Then-Vice-Chancellor Chancellor Sam Glasscock III more recently while different from these shareholder ing stock corporations in explaining that (i)
Leo e. Strine Jr. characterized such cases criticized plaintiffs’ “scattershot approach” cases, ATP in many ways represents their cul- facially valid bylaws can be unenforceable if
in Cox Communications as “non-meritori- to such cases: “After the announcement of mination because it could provide Delaware adopted or used for an improper purpose (id.
ous premature suits attacking negotiable,
a merger or acquisition, stockholder class corporations the means to deter suits that at 558-59); and (ii) fee-shifting bylaws are not
action suits typically follow like mushrooms yield “peppercorn settlements.” ATP involved per se improper because deterring litigation
follow the rain ... [and] plaintiffs then rely claims between the ATP Tour, a non-stock is a legitimate purpose (id. at 560).

wiLLiam J. SuShon is a partner and Samantha on the court to winnow their claims, deter- corporation that operates a global profes- A shareholder plaintiff may nevertheless
a. BrutLag and eDwarD n. moSS are counsel at mining which are meritorious and what sional men’s tennis tour, and two of its mem- try to distinguish between stock and non-
O’Melveny & Myers in New York, where they are value they confer upon the stockholders. bers (the Deutscher Tennis Bund and Qatar stock corporations to argue that a fee-shifting
members of the securities litigation practice group. This dynamic obviously creates a risk of Tennis Federation) that asserted breach of bylaw is facially invalid for a stock corpo-
garrett J. SChuman, a summer associate, assisted excessive merger litigation, where the costs fiduciary duty and federal antitrust claims. ration. One argument might be that share-
in the preparation of this article.
to stockholders exceed the benefits.” Dias
After prevailing at trial, the Tour sought its
holders in stock corporations often include