EXCLUSIVE FORUM BYLAWS Delaware Court of Chancery Approves Board-Adopted Forum Selection Bylaws By Philip Stamatakos and Marjorie Duffy In a highly anticipated decision, the Delaware In these instances, duplicative lawsuits com- Court of Chancery upheld the validity of monly are filed in multiple state and federal board-adopted forum selection bylaws. In June courts, forcing companies to defend litiga- 4 Shareholder lawsuits 2013, Chancellor Strine affirmed that a board tion in multiple fora. of directors has the statutory authority to may be filed both where a defendant corpo- unilaterally adopt forum selection bylaws if ration is incorporated and also where it is the corporation’s certificate of incorporation headquartered, which, for the vast majority 1 If permits the board to amend its bylaws. of Delaware corporations, is somewhere other upheld on appeal, the court’s decision means than Delaware. 5 that boards of Delaware corporations can reduce the threat of multiforum litigation by There are no benefits to litigating the same amending their bylaws to designate Delaware claim in multiple courts, but the problems as the exclusive forum for litigation relat- are myriad. For example, multiforum litiga- ing to the corporation’s internal affairs. This tion imposes significant costs on corporations will enable corporations to litigate certain and their shareholders, who ultimately bear the shareholder disputes more efficiently and with costs of litigation and settlement. It also need- greater predictability. lessly burdens the judicial system and wastes judicial resources, as judges in multiple jurisdic- tions review the same pleadings and often are Proliferation of Multiforum asked to decide identical motions. That creates a real and significant risk that a corporation Litigation could be subject to inconsistent judgments. In recent years, shareholder litigation invari- Conflicting judicial mandates also would leave 6 ably has followed nearly every announcement of the law in a confused state. a merger, regardless of size. Ninety-six percent of public-company merger announcements val- The Exclusive Forum Solution ued at $1 billion or more are met with litigation, with an average of over six shareholder lawsuits 2 Relatively small transactions per transaction. The adoption by corporations of forum are not immune. For example, 18 lawsuits selection provisions is a direct response to were filed in connection with the acquisition the phenomenon of multiforum litigation. of Conexant Systems, which was valued at These provisions impose order before liti- 3 Though much of the data pub- $280 million. gation begins by designating an exclusive lished on duplicative litigation focuses on the forum for intracorporate disputes, includ- proliferation of litigation relating to mergers ing derivative actions, fiduciary-duty actions, and acquisitions, shareholder litigation often actions arising out of the Delaware General follows the announcement of adverse corporate Corporation Law, and actions concerning the developments as well. internal affairs of a corporation. Forum selec- tion provisions do not regulate “external” dis- putes, such as tort or contract claims, that are unconnected to a plaintiff’s status as a share- Philip Stamatakos is a partner and Marjorie Duffy is an holder. Instead, the provisions relate only to associate with Jones Day. The opinions expressed in this those actions that are unique to shareholders article are those of the authors and not necessarily those of as shareholders. Jones Day or any of its clients. Volume 21, Number 5 25 The Corporate Governance Advisor
Until early 2010, only a handful of publicly It is the first method of adopting forum selec- traded Delaware corporations had adopted tion provisions—the board-approved bylaw 7 Then, in March forum selection provisions. provision without a shareholder vote—that was 2010, Vice Chancellor Laster suggested in an the subject of the recent Chancery Court litiga- 10 After those lawsuits were filed in early opinion that corporations concerned about tion. multiforum litigation relating to intracorpo- 2012, the rate of bylaw amendment adoption rate disputes could adopt such provisions in ground to a halt, as companies waited to see 8 After that opinion, the num- their charters. whether the bylaws would withstand challenges 11 ber of corporations that adopted forum selec- to their validity. tion provisions skyrocketed and, by September 2012, over 250 corporations had adopted such Shareholders Challenge the 9 provisions. Chevron and FedEx Bylaws It has become increasingly common for corpo- rate boards to unilaterally adopt forum selection In 2010 and 2011, the boards of Chevron provisions in bylaws or in circumstances that do and FedEx adopted identical bylaw provisions not require shareholder approval. Forum selec- selecting the Delaware Court of Chancery as tion bylaw provisions may be adopted by boards the exclusive forum for intracorporate disputes of Delaware corporations under the author- relating to internal corporate affairs (except ity of 8 Del. C. § 109(a), which provides that a in cases in which the corporations consent to corporation’s certificate of incorporation may another forum). Each board adopted the bylaw confer the power to adopt and amend bylaws on pursuant to powers granted to it in the com- its board of directors, provided that the bylaw pany’s certificate of incorporation; the matter provisions are not inconsistent with Delaware was not put to a shareholder vote. law or the certificate of incorporation. Delaware public companies’ certificates of incorporation Beginning in February 2012, shareholders commonly confer such power on boards and filed identical complaints in the Delaware Court this has permitted their boards to unilaterally of Chancery attacking the board-adopted adopt forum selection provisions without the bylaws of a dozen companies, including need to put the matter to a shareholder vote. Chevron and FedEx. The complaints chal- lenged the statutory and contractual validity By contrast, a Delaware corporation that of the forum selection bylaws. In response, ten adopts forum selection provisions in its certifi- of the sued corporations repealed their forum cate of incorporation does so under the author- bylaws. ity of 8 Del. C. § 102(b)(1), which provides that a certificate of incorporation may contain any In March 2013, Chevron amended its bylaw provision for the conduct of the corporation’s to address potential concerns about subject- affairs and any provision that limits or regu- matter jurisdiction for exclusively federal claims lates the powers of its shareholders provided and personal jurisdiction over certain defen- that such provisions are not contrary to law. dants. As revised, Chevron’s bylaw provided, in Companies that are already public may adopt part, that: forum selection provisions in their charters only with shareholder consent. In addition, com- Unless the Corporation consents in writing panies that are going public, being spun-off, to the selection of an alternative forum, the emerging from bankruptcy, or reincorporat- sole and exclusive forum for … [intracor- ing often adopt charter provisions because, in porate disputes] shall be a state or federal those circumstances, adoption can be accom- court located within the state of Delaware, plished with no public shareholder vote or with in all cases subject to the court’s having minimal shareholder resistance because of sur- personal jurisdiction over the indispensible rounding circumstances. parties named as defendants. The Corporate Governance Advisor 26 September/October 2013
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