May Have Profound Impact for Delaware Corporations and Shareholder Litigation Fee-Shifting.
Though occurring in a Delaware non-stock corporation context, the Delaware Supreme Court in ATP Tour, Inc. v. Deutscher Tennis Bund (German Tennis Federation), Del. Sup. Ct. Case No. 534, 2013 (May 8, 2014) addressed whether Delaware corporations can adopt bylaws requiring shareholders/LLC members who sue the corporation to pay its legal costs should be shareholder/members obtain no relief or not achieve their main litigation objectives. The issue arose from a federal court certification request after a lower federal court decided that the bylaw was preempted under antitrust law (because the underlying suit involved antitrust issues).
Surprising to some, the answer was “yes,” such a bylaw is enforceable and can be used to modify the “American Rule” that each side bears its own costs absent a contrary contract or statute.
Beyond that, the Delaware Supreme Court held that (1) the bylaw is enforceable even if the shareholders/members obtained no relief, (2) an intent to deter litigation is a motive which will not necessarily render the bylaw unenforceable in equity, and (3) the bylaw can be enforced against shareholders/members who join the corporation/LLC before the bylaw’s enactment.
This could really have an impact on some Delaware shareholder suits.
For you purists, here is the bylaw considered by the Delaware high court:
(a) In the event that (i) any [current or prior member or Owner or anyone on their behalf (“Claiming Party”)] initiates or asserts any [claim or counterclaim (“Claim”)] or joins, offers substantial assistance to or has a direct financial interest in any Claim against the League or any member or Owner (including any Claim purportedly filed on behalf of the League or any member), and (ii) the Claiming Party (or the third party that received substantial assistance from the Claiming Party or in whose Claim the Claiming Party had a direct financial interest) does not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought, then each Claiming Party shall be obligated jointly and severally to reimburse the League and any such member or Owners for all fees, costs and expenses of every kind and description (including, but not limited to, all reasonable attorneys’ fees and other litigation expenses) (collectively, “Litigation Costs”) that the parties may incur in connection with such Claim.
Comments