Logo image of the seal of the Supreme Court of Delaware

Delaware Quietly sets New Standard for Intra-corporate Litigation

On May 8th. 2014 the Delaware Supreme Court upheld a corporate bylaw that placed the burden of paying attorney’s fees and costs in intra-corporate litigation on the losing party. The case, ATP Tour, Inc. v Deutscher Tennis Bund, et al., revolved around a bylaw set by the ATP’s board in 2006 which stipulated that if a member should assert a claim against the ATP, and the member loses, the member is obligated to reimburse the league for fees associated with the suit.

In 2007, the bylaw was tested when the German Tennis Federation and the Qatar Tennis Federation – both members of the ATP – sued the ATP after it was downgraded to a lower tier and its season was changed from spring to less desirable summer play. When the federations lost their plea in court, the ATP sought damages according to the bylaws, and the resulting case in May upheld the bylaw.

Read a thorough synopsis of the case on the Jones-Day website.

Far-reaching implications for business

It’s clear to see that this volley between a few tennis associations could have far-reaching implications for corporations across the U.S.

According to the State of Delaware, more than one million companies have incorporated there. In fact, more than half of publically traded corporations listed on U.S. stock exchanges and fully 64 percent of Fortune 500 companies are incorporated in Delaware, according to the Delaware Division of Corporation’s 2012 Annual Report.  If these companies begin adopting “loser pays” bylaws of their own in an effort to deter shareholder lawsuits, it could change the nature of business in America.

Shareholder law suits have been on the rise over the last few years. According to Cornerstone Research, in 2007, investors challenged 44 percent of corporate mergers. In 2013, investors challenged 94 percent of corporate mergers.

In future, the risk of filing such lawsuits could be much higher, and shareholders may think twice before initiating a suit, even if the only objective of the suit is to gain better information about potential mergers. On the other hand, shareholders moving forward with cases will have more motivation to build a stronger case, which could be bad news for directors and officers who could become the “losers” in more effectively-structured lawsuits.

Cover your risks

Directors and officers may want to consider how the ruling in Delaware might put them at additional risk in the future, and take a look at obtaining additional coverage to insure against unanticipated legal fees. If we can help you determine what kind of coverage you may need, please contact us for more information.