In light of the recent legislative initiative to restrict Delaware stock corporations’ use of fee-shifting bylaws, companies incorporated in Delaware have, as described in a recent Law 360 article (here, subscription required) a “smaller more defined toolbox” to reduce the burdens involved with shareholder suits. As it stands, the article notes, the “sharpest tool in the arsenal is boards’ ability to define where cases will be heard.” As the Jones Day law firm noted in a May 2014 memo (here), the use of exclusive forum provisions has become “mainstream.” An increasingly large number of companies are adopting forum selection by laws and courts outside of the selected forum are showing a consistent willingness to enforce the provisions.
As discussed here, in June 2013, the Delaware Chancery Court upheld the validity of a bylaw adopted by Chevron’s board that designated Delaware as the exclusive forum for adjudication of various shareholder disputes. Although the plaintiffs in that case withdrew their appeal, so that there was no Supreme Court review of the Chancery Court ruling, the “overwhelming view of corporate law experts,” according to the Jones Day memo, is that “exclusive forum provisions are valid and enforceable under Delaware law.”
A May 28, 2014 memo from the Sullivan & Cromwell law firm entitled “Exclusive Forum Bylaws Gain Momentum” (here) takes a detailed and comprehensive look at the ways that companies and courts have become increasingly comfortable with these exclusive forum provisions.
First, the Sullivan & Cromwell memorandum details the benefits that these kinds of provisions afford. An exclusive forum bylaw can “discourage forum shopping by plaintiffs and the practice of litigating similar or identical claims in multiple jurisdictions.” The bylaws “remove the need to hire multiple counsel and make filings in different jurisdictions.” These kinds of provisions “reduce the risk of inconsistent outcomes.” And they allow companies to designate a court with “particular expertise in corporate matters” – for example, the Delaware Court of Chancery.
Second, the memo details the extent to which an increasing number of companies are adopting these kinds of provisions. Just in the first six months after the Chancery Court ruling in the Chevron case, as many as 112 Delaware corporations adopted or announced plans to adopt exclusive forum bylaws. A detailed appendix to the memo examines the 32 S&P 500 corporations that have adopted exclusive forum bylaws. These kinds of provisions increasingly are included in the charters or bylaws of companies conducting initial public offerings. As the memo notes, while the various shareholder proxy advisory services have recommended against bylaw proposals, shareholders themselves “do not appear to have resisted their adoption or punished directors or companies that have adopted them”
Third, and perhaps most significantly for these bylaws to be useful, “all state courts that have considered the enforceability of exclusive forum provisions have upheld them, including courts in California, New York, Illinois and Louisiana.” These decisions, the memo notes, “demonstrate a judicial willingness to honor exclusive forum bylaws.” If the trend of enforcement of forum provisions by non-Delaware courts continues, the need to litigate the question outside of Delaware “may become less of a burden.”
In light of these developments and the benefits the bylaws can afford by reducing the costs of multi-jurisdictional litigation “companies should give serious consideration to adopting such a bylaw.” Companies considering whether or not to adopt a forum selection bylaw may want to consider whether or not to adopt the provision in the bylaws or to take the further step of amending the corporate charter and whether to include express carve-out provisions when the chosen forum does not have personal or subject-matter jurisdiction.
The memo also suggests that in order to avoid undermining the potential effectiveness of the provision, it would be “prudent” for companies to “adopt an exclusive forum provision well before any corporate event that could reasonably be anticipated to give rise to litigation.” A company adopting a forum selection by law “should ensure that the company’s public disclosure approximately explains the rationale for the adoption, including any excessive costs that the company has incurred from multi-jurisdictional litigation.”
The memo helpful includes some sample bylaw language for companies to review in connection with their adoption of a forum selection bylaw. The table appended to the memo includes a detailed review of the provision that various S&P 500 companies have adopted, and with respect to each example, the table notes the company involved; the forum selected; whether or not the bylaw allows for an alternative forum; the kinds of claims to which the bylaw applies; and whether or not the bylaw include a jurisdictional consent provision.
As various academic and research studies have well documented, virtually every M&A transaction these days attracts litigation. All too often, this litigation includes entails a multi-jurisdictional battle. Indeed, as Cornerstone Research detailed in its 2013 study of M&A-related litigation, 62% of mergers and acquisitions in 2013 were litigated in more than one court. The adoption of a forum selection provision provides companies a way to fight back against the curse of multi-jurisdiction litigation. As the Jones Day memo to which I linked above puts it “an exclusive forum bylaw is not intended to prevent plaintiffs from bringing deal-related litigation, but instead to prevent forum-shopping, to avoid the costs and expenses of multi-forum litigation, and to ensure that the litigation is heard in Delaware by Delaware judges.”
While, as I noted at the outset, a forum selection bylaw may be the “sharpest tool in the arsenal” for corporate boards trying to reduce the burdens and expense of shareholder litigation, there is yet another bylaw innovation that is in play. As discussed at length here, several court rulings have now upheld the enforceability of a bylaw provision requiring the arbitration of shareholder disputes. While the developments in this area are at most nascent, the possibility of a bylaw provision containing a class action litigation waiver potentially could significantly alter the shareholder litigation environment. In other words, there could be at least one or two other tools in the arsenal for companies to use to try to avoid the burdens and expense of shareholder litigation.
Read other items of interest from the world of directors & officers liability, with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
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