A little inside scoop in the ATP fee-shifting bylaws case

by Cydney Posner

Today, at the PLI Securities Regulation Institute, the Honorable Jack Jacobs, formerly a Justice of the Delaware Supreme Court, was asked to comment on ATP Tour, Inc. v. Deutscher Tennis Bund, the Delaware Supreme Court case holding that a “fee-shifting” bylaw adopted by a board was “facially valid” under Delaware law   His response was very interesting.

As you may recall, ATP is a Delaware membership corporation that operates a global professional men’s tennis tour. The Deutscher Tennis Bund (“DTB”) is a member of ATP.  Following changes by ATP in its tour schedule that adversely affected a DTB tennis tournament, DTB sued ATP for breach of fiduciary duty and antitrust in Delaware’s Federal District Court. ATP was successful in the case, and then sought to collect its costs and fees from DTB under ATP’s fee-shifting bylaw. The district court certified four questions of law to the Delaware Supreme Court regarding whether a fee-shifting bylaw was permissible under Delaware law. The Delaware Supreme Court held that a fee-shifting bylaw was permissible, although whether any particular bylaw was valid and enforceable in any individual case would turn “on the circumstances surrounding its adoption and use,” in particular, whether the bylaw was “adopted or used for an inequitable purpose”.

The former Justice indicated (and please recognize that below is just a summary paraphrase of some of his comments as I heard them) that he was surprised that many counsel assumed that the holding in the case would be applied in the larger public company context. The court, he said, had viewed ATP  (a non-stock entity) to be similar to a private club or closely held corporation; the types of bylaw arrangements that may be upheld as valid in that context might not necessarily be viewed as valid and appropriate for large public companies. As a result, public companies adopting fee-shifting bylaws may find that they face challenges to show, not just that the bylaws are valid as applied in the particular circumstances, but also that the holding of ATP is applicable in the public company context.

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