Corporations in the United States have generally faced a litigious environment where shareholders are not shy in challenging boards on matters such as M&A transactions and compensation paid to executives. As a result, many U.S. corporations have amended their by-laws to include a provision that designates the forum or jurisdiction in which shareholder litigation must take place. In Canada, forum selection by-laws have only started to emerge, with a few corporations conducting initial public offerings including these provisions in their by-laws.
The purpose of a forum selection by-law is to channel certain types of litigation into a particular forum or jurisdiction. These by-laws will generally cover any claims a shareholder may have against a corporation, including: (a) derivative actions or proceedings, (b) oppression claims, (c) claims relating to breaches of fiduciary duty or duty of care by a director, officer or employee of a corporation, (d) claims relating to non-compliance with the articles or by-laws of the corporation, and (e) actions or proceedings relating to the affairs of the corporation (generally “corporate affairs litigation”). However, forum selection clauses will only apply to matters relating to the internal affairs of the corporation and other matters such as product liability claims, contractual disputes, etc. that involve the corporation will not be subject to such provisions. A forum selection by-law will not limit or restrict shareholders and other plaintiffs from bringing claims for such other matters in any appropriate forum.
The main advantage of a forum selection by-law is that costs are reduced for corporations as corporate affairs litigation is channeled into one forum (typically the jurisdiction of incorporation or location of its principal office). Furthermore, inefficiencies in litigation resulting from actions brought in inconvenient forums are also prevented. Plaintiffs are prevented from forum shopping and plaintiffs' counsel is prevented from filing multiple lawsuits in multiple jurisdictions, which can lead to uncertain and inconsistent outcomes. Forum selection by-laws also permit corporations to identify and choose courts that have particular expertise in certain matters. Certain forums may also be more convenient for corporations, such as a jurisdiction where the corporate records, witnesses and documents are.
Although the validity and scope of forum selection by-laws has not been tested by Canadian courts, the courts in the United States have consistently upheld the validity of forum selection provisions, most notably in the Delaware Court of Chancery's decision in Boilermakers Local 154 Retirement Fund v. Chevron Corp. (73 A. 3d 934 (Del. Ch. 2013)). The court held that regulating where litigation relating to internal affairs will proceed is an appropriate matter for boards to enact through the corporation's by-laws. The courts have noted, however, that in certain situations where forum selection by-laws have been adopted in an unreasonable or unjust manner or if there has been a breach of fiduciary duty by the corporation's directors in the adoption of the forum selection by-law, the forum selection by-law may not be upheld. In July 2015, the Delaware Code was amended to expressly provide that corporations may include exclusive forum selection provisions in their by-laws.
While an amendment to a corporation's by-laws to adopt forum selection provisions may sound reasonable and appropriate, proxy advisory firms have been cautious in their reactions and will consider such amendments on a case-by-case basis. Glass Lewis & Co. and Institutional Shareholder Services generally recommend that shareholders vote against such by-law amendments unless certain criteria are met, such as the corporation providing a compelling argument that such a provision is necessary and would benefit shareholders.
Recent developments indicate that forum selection by-laws are being accepted both in boardrooms and by courts. However, it is important for boards that are considering adopting such by-laws to take into account the advantages and disadvantages discussed above, to test the possible reaction of proxy advisory firms, and to ensure that adoption of such a policy is consistent with their fiduciary duties and is appropriate in scope for corporate affairs litigation.