Friday, May 9, 2014

Did Delaware just change the rules of the game?

In ATP Tour, Inc., et al. v. Deutscher Tennis Bund, et al., the Supreme Court of Delaware upheld a fee-shifting provision in a non-stock corporation's bylaws, providing that unsuccessful plaintiffs in intracorporate litigation would be required to pay the fees and costs of defendants.

The court was answering a certified question from the Third Circuit, and thus was careful to note that it was only answering the question in the abstract, and that any such bylaw would have to be tested in a particular instance to determine if it was equitable.  But the court agreed that the bylaw appropriately concerned 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" as the DGCL requires, and therefore was within the power of the directors to adopt.  The court also held that the purpose to deter litigation was not, in the abstract, "improper," such that the bylaw could be invalidated on that ground.

The court was careful to repeat that this was a "nonstock" corporation, but nothing in the opinion suggests that the outcome would be any different for a publicly-traded corporation.

I've got to admit, I'm kind of amazed, looking at it from a purely cynical perspective.  Previously, in Boilermakers Local 154 Ret. Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013), a Delaware Chancery court upheld forum selection provisions in the corporate bylaws of a publicly traded corporation, using a similar rationale - but it's impossible not to notice that that decision only benefitted Delaware, since it was a foregone conclusion that most corporations choosing to enact such bylaws would select Delaware as the forum.

If corporations enact fee-shifting provisions, though, that could seriously deter intracorporate litigation in general - which would not, in the long run, be particularly beneficial to Delaware.

Of course, it remains to be seen how Delaware courts will treat specific instances of fee-shifting provisions in particular cases - it may ultimately set the bar so high for review of such clauses that effectively they have little application. It's also very difficult to gauge how such clauses will or should apply to class actions or to derivative claims - in those cases, the individual plaintiff bringing the lawsuit does so on behalf of all stockholders, and therefore it hardly makes sense for it to shoulder burdens properly allocable to all stockholders.  But even outside of those contexts, a fee-shifting provision could be a powerful new form of antitakeover device.

But the next question is the elephant in the room - binding arbitration of shareholder disputes.  Even if Delaware would otherwise be inclined to reject such clauses as a bridge too far, after permitting forum selection provisions and fee-shifting provisions, under the Federal Arbitration Act, Delaware may be required to treat arbitration clauses similarly.  (A Maryland court recently held that arbitration clauses in the bylaws of a REIT were binding on all shareholders; that decision was then endorsed by a federal court in Del. County Emples. Ret. Fund v. Portnoy, 2014 U.S. Dist. LEXIS 40107 (D. Mass. Mar. 26, 2014)).  And if that happens ... well, there are a number of possibilities, but the most obvious would be a dramatic reduction of shareholder litigation in Delaware.

Ann Lipton | Permalink


Is this the case I've heard described as approval of the "new poison pill?"

Posted by: Tom N | May 10, 2014 8:59:26 PM

Actually, probably not - you were probably hearing about poison pills designed to limit the power of activist investors to gain the power to push for changes while allowing passive investors to accumulate a larger stake. There was recently a fight over that kind of pill involving Sotheby's - Chancery approved the pill, but the company ultimately settled with the investor anyway and allowed him three board seats.

Posted by: Ann Lipton | May 11, 2014 1:05:40 AM

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