Norton Rose Fulbright Canada has recently been involved in the introduction and adoption of forum selection by-laws in Canada. This article will provide a brief description of forum selection by-laws and their benefits and uses. For a more in-depth analysis, we invite readers to watch the replay of the talk or reach out to the chairs of our Special Situations Team.
What is a forum selection by-law?
A forum selection by-law can be used by corporations to help ensure that lawsuits regarding the internal affairs of the corporation are limited to a single jurisdiction as chosen by the corporation (usually the jurisdiction of incorporation or of the corporation’s headquarters). Such by-laws are brand new to Canada. They have found popularity in Delaware, however, as exemplified by the Delaware Court of Chancery’s decision of Boilermakers Local 154 Retirement Fund v. Chevron Corp in June, 2013.
Although the permissible scope of a forum selection by-law has not yet been tested in Canada, they arguably cover a broad range of potential claims pertaining to breach of fiduciary duty or duty of care by the corporation or its management, derivative actions, oppression claims, and other claims based on alleged non-compliance with the corporation’s governing legislation, articles and by-laws – that is to say, intra-corporate disputes. It should be noted that forum selection by-law controls how shareholders may bring claims, it would not regulate whether they may bring claims, nor limit what kind of remedy they are eligible to obtain. In short, the point of a forum selection by-law is not to oust valid shareholder claims; rather, they aim to unify the best interests of the corporation and its shareholders, as a whole, by ensuring that such litigation progresses in an orderly and sensible manner.
What are the potential benefits of forum selection by-laws?
The two key benefits of a forum selection by-law are that they grant corporations a degree of control over the cost and uncertainty of intra-corporate litigation. By requiring that disputes relating to the internal affairs of the Corporation are litigated in a forum of the Corporation’s choosing, forum-selection by-laws:
Help to avoid litigation in jurisdictions with limited experience Like Delaware, the commercial list in Toronto is developing a degree of expertise whereby decisions may be resolved more predictably and expeditiously. As has happened in the States, there is a risk that plaintiffs will seek to bring weaker claims in alternate forums to increase both delay (and potentially forcing a settlement where time is of the essence) and chances of success. Reduce the costs, inefficiencies and potential inconsistency of duplicative litigation in multiple jurisdictions. A recent study from Cornerstone Research has shown a reversal of a five-year trend of increasing multi-forum M&A related litigation. In 2014, for the first time in 5 years, the majority of such litigation occurred in one forum. This result likely stems from the fact that over 300 companies adopted forum selection by-laws in 2013 and 2014. Increase convenience and decreases distraction for the corporation by having the litigation heard in the forum most closely connected to the corporation (e.g. the location of corporate witnesses and potentially relevant documents).
Once initial questions about the validity and scope of forum selection bylaws are established in Canada, such by-laws will likely prove an important tool for corporations to control the cost and uncertainty of intra-corporate litigation.