M OST mergers will draw a legal challenge, as has been the case for - PDF document

THE VALIDITY OF LITIGATION-REFORM BYLAWS IN OHIO Geoffrey Ritts and Brandon Mordue * I NTRODUCTION M OST mergers will draw a legal challenge, as has been the case for many years. 1 Yet, empirical studies have suggested that much of this litigation is of dubious value to the stockholders on whose purported behalf these lawsuits are filed. 2 In response to this problem, practitioners have developed a number of innovative corporate-governance mechanisms designed to reduce the burden of stockholder litigation. 3 Three such mechanisms are forum-selection provisions, fee-shifting provisions, and minimum-stake-to-sue provisions. 4 This article considers the viability of these devices under Ohio law. As discussed below, forum-selection bylaws and fee-shifting provisions likely would be upheld under Ohio law. Minimum-stake-to-sue provisions, on the other hand, might face more doubtful odds in court. Moreover, it may be that in Ohio, unlike Delaware, the courts would require that some or all of these provisions be adopted by stockholders and not by * The authors are a partner and an associate, respectively, at Jones Day, resident in the firm’s Cleveland office. The views set forth herein are the authors’ and do not necessarily reflect those of their law firm. 1. R AVI S INHA , C ORNERSTONE R ESEARCH , S HAREHOLDER L ITIGATION I NVOLVING A CQUISITIONS OF P UBLIC C OMPANIES : R EVIEW OF 2015 AND 1H 2016 M&A L ITIGATION 1 (2016), https://www.cornerstone.com/Publications/Reports/Shareholder-Litigation-Involving-Acquisitions- 2016.pdf (showing that at least 50% of mergers have been challenged in court every year since 2008, with a 64% challenge rate in the first half of 2016). 2 . See, e.g. , Jill E. Fisch, Sean J. Griffith, & Steven Davidoff Solomon, Confronting the Peppercorn Settlement in Merger Litigation: An Empirical Analysis and a Proposal for Reform , 93 T EX . L. R EV . 557, 566, 572, 585 (2015) (observing that over 70% of merger lawsuits settle, with more than three-quarters of those settlements being disclosure-only settlements that generate attorneys’ fees and supplemental disclosures that the authors show have a statistically insignificant effect on stockholder votes on the mergers). 3 . See Stephen M. Bainbridge, Fee-Shifting: Delaware’s Self-Inflicted Wound , 40 D EL . J. C ORP . L. 851, 862 (2016) (reviewing the economic literature on stockholder lawsuits and concluding that a “shareholder class action[ ] thus is a wealth transfer from the company’s current shareholders to those who held the shares at the time of the alleged wrongdoing,” a transfer that likely results in “an overall loss of wealth” to the average diversified investor). 4 . See generally B ETH I.Z. B OLAND , M ICHAEL K IRWAN , & N EDA S HARIFI , C ORPORATE B OARD , B YLAW W ARS : B OARDS A WAKEN (2016), https://www.foley.com/files/uploads/News/1603 BolandKirwanSharifi.pdf (describing various types of litigation-reform bylaws). 27

28 VALIDITY OF OHIO LITIGATION-REFORM BYLAWS [Vol. 49 directors unilaterally. 5 Aside from legal validity, there are other factors for a company to consider before adopting any of these provisions. I. F ORUM -S ELECTION P ROVISIONS A forum-selection bylaw operates like a forum-selection clause in a contract: it mandates that all claims of a certain type—for example, fiduciary-duty claims against directors—be brought in a specific forum, typically the corporation’s state of incorporation or principal place of business. 6 These provisions emerged as a relatively early response to the explosion of multijurisdictional merger litigation, and they have received extensive attention in Delaware. 7 In Boilermakers Local 154 Retirement Fund v. Chevron Corp. , 8 the Delaware Court of Chancery upheld forum-selection bylaws adopted unilaterally by the boards of directors of Chevron and FedEx. The court began from the premise that bylaws are a contract among a corporation and its stockholders, officers, and directors that “is, by design, flexible and subject to change,” including via unilateral amendment by the directors, a possibility that is known by stockholders when they purchase shares. 9 The court concluded that forum-selection bylaws were valid because the provisions were process-oriented, as opposed to substantive: “[T]hey regulate where stockholders may file suit, not whether the stockholder may file suit or the kind of remedy that the stockholder may obtain on behalf of herself or the corporation.” 10 Recently, the Delaware legislature enacted legislation codifying the outcome in Boilermakers by permitting forum-selection bylaws, but also requiring that any such bylaw designate Delaware as an available forum. 11 To the authors’ knowledge, no court has directly addressed the validity of such provisions under Ohio law. But, the existing case law suggests that an analysis similar to that applied by the Delaware courts would carry the day. Regulations, Ohio’s term for bylaws, “have the force of contracts between the corporation and its shareholders,” 12 just as in Delaware. Similarly, existing Ohio case law provides strong support for upholding forum-selection clauses in the 5 . See O HIO R EV . C ODE A NN . § 1701.11(B)(11) (West, Westlaw through 2017 Files 1 to 13 and 15 to 17 of the 132d Gen. Assemb. (2017-2018)). 6 . See In re Revlon, Inc. S’holders Litig., 990 A.2d 940, 960 (Del. Ch. 2010) (suggesting in dicta that “if boards of directors and stockholders believe that a particular forum would provide an efficient and value-promoting locus for dispute resolution, then corporations are free to respond with charter provisions selecting an exclusive forum for intra-entity disputes”). 7 . See generally Verity Winship, Shareholder Litigation by Contract , 96 B.U. L. R EV . 485 (2016). 8. 73 A.3d 934, 963 (Del. Ch. 2013). 9 . Id . at 939. 10 . Id . at 951-52. 11. D EL . C ODE A NN . tit. 8, § 115 (West, Westlaw through 81 Laws 2017, chs. 1-66. Revisions to 2017 Acts by the Delaware Code Revisors were unavailable at the time of publication), superseding in part City of Providence v. First Citizens BancShares, Inc., 99 A.3d 229 (Del. Ch. 2014). 12. Carr v. Acacia Country Club Co., 970 N.E.2d 1075, 1086 (Ohio Ct. App. 2012).

Fall 2017] THE UNIVERSITY OF TOLEDO LAW REVIEW 29 commercial context. 13 “Absent evidence of fraud or overreaching, a forum selection clause contained in a commercial contract between business entities is valid and enforceable, unless it can be clearly shown that enforcement of the clause would be unreasonable and unjust.” 14 The “business entities” language appears to be interpreted loosely, because an unincorporated sole proprietor is considered a “business entity.” 15 It is reasonable to expect that purchasing stock (buying an equity interest in a business) would be viewed by Ohio courts as a commercial transaction. One potential difference between Delaware and Ohio is that Ohio’s corporate code limits directors’ ability to amend the bylaws unilaterally. 16 Ohio’s corporate law specifies that the “regulations may include provisions ... [d]efining, limiting, or regulating the exercise of the authority of the shareholders; provided, that any amendment of the regulations that would change or eliminate any such provision shall be adopted only by the shareholders.” 17 This unfortunately vague provision appears never to have been interpreted by a court, and the drafting history offers little guidance on its meaning. 18 Depending on how courts interpret it, an Ohio corporation adopting a forum-selection bylaw may be required to do so by stockholder vote, rather than by unilateral action of the directors. A final concern is that, even if forum-selection bylaws would be valid under Ohio law, other states may not enforce them. Both Ohio and Delaware, for example, permit as-applied equitable challenges to forum-selection provisions. 19 Fortunately, the cases addressing this issue so far suggest that other states will favor comity and will enforce forum-selection bylaws. 20 II. F EE -S HIFTING P ROVISIONS Fee-shifting provisions require a losing litigant to pay the prevailing party’s attorneys’ fees. 21 Currently, in stockholder litigation, the corporation pays its own fees every time—win or lose—and, pursuant to the corporate benefit doctrine, the 13 . See generally Kennecorp Mortg. Brokers, Inc. v. Country Club Convalescent Hosp., 610 N.E.2d 987 (Ohio 1993). 14 . Id . at 989. 15 . See Info Leasing Corp. v. Jaskot, 784 N.E.2d 1192, 1196 (Ohio Ct. App. 2003) (“It is immaterial that [defendant] is a sole proprietor.”). See also Preferred Capital, Inc. v. Power Eng’g Grp., Inc., 860 N.E.2d 741, 745 (Ohio 2007). 16 . See David Porter, Competing with Delaware: Recent Amendments to Ohio’s Corporate Statutes , 40 A KRON L. R EV . 175, 191 n.96 (2007). 17. O HIO R EV . C ODE A NN . § 1701.11 (West, Westlaw through 2017 Files 1 to 13 and 15 to 17 of the 132d Gen. Assemb. (2017-2018)). 18 . See generally Porter, supra note 16. 19 . See Boilermakers Local 154 Ret. Fund v. Chevron Corp., 73 A.3d 934, 954 (Del. Ch. 2013); Preferred Capital , 860 N.E.2d at 743. 20 . See Roberts v. TriQuint Semiconductor, Inc., 364 P.3d 328, 337 (Or. 2015) (enforcing bylaw selecting Delaware as exclusive forum); North v. McNamara, 47 F. Supp. 3d 635, 648 (S.D. Ohio 2014) (enforcing, under federal law, board-adopted bylaw of Ohio-domiciled Delaware corporation and transferring derivative suit to Delaware); id. at 642 n.3 (collecting state-court decisions). 21. Sean J. Griffith, Correcting Corporate Benefit: How to Fix Shareholder Litigation by Shifting the Doctrine on Fees , 56 B.C. L. R EV . 1, 6 (2015).