The 2015 proxy season is just a few months away. It was about 18 months ago that the Delaware Court of Chancery upheld exclusive forum bylaws as facially valid in Boilermakers Local 154 Ret. Fund v. Chevron Corp.1 In May of this year, the Delaware Supreme Court upheld the facial validity of a fee-shifting bylaw for a Delaware non-stock corporation in ATP Tour, Inc. v. Deutscher Tennis Bund.2 The following sets forth a few considerations to help companies evaluate whether to propose charter amendments for either or both provisions at their 2015 annual stockholder meetings.
Forum Selection Provisions
Exclusive forum provisions represent a company self-help remedy to combat the significant growth in forum shopping and multiforum actions faced by public companies in stockholder litigation.3 The provisions designate courts (typically in the jurisdiction of incorporation, but sometimes the jurisdiction where the company is headquartered) as the exclusive forum to hear four types of litigation: derivative actions, actions asserting a breach of fiduciary duty by a director, officer or other employee, claims arising under the corporation law of the company’s
1 73 A.3d 934 (Del. Ch. 2013).
2 91 A.3d 554 (Del. 2014).
3 This is particularly evident in M&A deals. In 2013, 94% of M&A transactions with a deal value over $100 million were challenged by shareholders, and 62% of the deals were litigated in more than one jurisdiction. See Cornerstone Research, “Shareholder Litigation Involving Mergers and Acquisitions, Review of 2013 M& A Litigation.”
state of incorporation, and claims governed by the internal-affairs doctrine. The current interest in exclusive forum provisions dates back to at least 2010, when Vice Chancellor Laster suggested in In re Revlon, Inc. Shareholders Litigation that “if boards of directors and shareholders 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.”4 It was not until the Chevron decision three years later that exclusive forum provisions were expressly upheld in stockholder litigation in Delaware courts.5 Since the Chevron decision, several states, including California, Illinois, Louisiana, New York, Ohio and Texas, have enforced exclusive forum bylaws of Delaware corporations.6
Given the judicial sanctioning of exclusive forum provisions, what are the concerns that companies should take into account when evaluating whether to propose exclusive forum charter amendments at their next annual stockholder meeting? The most obvious concern is whether stockholders will support the amendment. For companies that have controlling or significant stockholders who can be counted on to support such a proposal, that may not be an issue. For other companies, the views of proxy advisory firms and institutional stockholders will need to be considered.
Proxy advisors generally disfavor exclusive forum provisions. Under the 2015 updates to its 2014 Proxy Voting Guidelines (the ISS 2015 Guideline Updates), Institutional Shareholder Services Inc. (ISS) will take a case-by-case approach, taking into account the company’s stated rationale for the provision, the company’s disclosed past harm from stockholder lawsuits, the breadth of the provision, and the company’s governance features, such as stockholder ability to repeal the provision, and the ability to hold directors responsible through annual elections and a majority voting standard.7 Notwithstanding ISS’ purported case-by-case approach, legal commentators have noted that ISS has consistently recommended against exclusive forum provisions. Similarly, the 2015 Proxy Season Proxy Paper Guidelines (the Glass Lewis Guidelines) of Glass Lewis & Co. (Glass Lewis) set forth Glass Lewis’ belief that charter or bylaw exclusive forum provisions are “not in the best interest of shareholders.” Accordingly, Glass Lewis recommends a vote against such charter or bylaw amendments unless the company provides a compelling argument why it is beneficial to stockholders, provides evidence of abuse of process in other jurisdictions, narrowly tailors the provisions, and maintains a strong record of good corporate governance practices.
4 990 A.2d 940 (Del. Ch. 2010).
- The Chevron decision upheld the facial validity of exclusive forum bylaws. However, some of the language in the decision, such as the court’s refusal to revive the vested-rights doctrine, and the court’s acknowledgement of the validity of board concern over multi-forum litigation, is also of relevance to charter provisions. In light of the Chevron decision and Vice Chancellor Laster’s exhortation in In re Revlon, there is little doubt as to the facial validity of exclusive forum charter provisions. Note, however, that exclusive forum provisions in both bylaw and charter amendments could be subject to “as applied” challenges.
- Not all courts have endorsed them. An Oregon state court found an exclusive forum bylaw unenforceable because it had been
adopted in connection with a merger and thus “in anticipation of the exact lawsuit” where its application was challenged. See Roberts v. Triquint Semiconductor, Inc., No. 1402-02441, slip. op. (Or. Cir. Ct. Aug. 14, 2014). A month later, a Delaware court ruled the other way in a similar as-applied challenge to an exclusive forum bylaw that was adopted in connection with an M&A transaction. See City of Providence v. First Citizens BancShares, Inc., C.A. No. 9795-CB slip op. (Del. Ch. Sept. 8, 2014).
- The description in ISS Guidelines Updates is phrased in terms of bylaw provisions, but logically also relates to charter provisions.
For institutional stockholders, the story is more nuanced. The Council of Institutional Investors (CII), which is a nonprofit association of pension funds, other employee benefit funds, endowments and foundations with combined assets that exceed $3 trillion, is opposed to exclusive forum provisions. Its Corporate Governance Policies provide that companies “should not attempt to restrict the venue for shareowner claims by adopting charter or bylaw provisions that seek to establish an exclusive forum.” Based on a review of voting records, government pension plans seem to generally oppose exclusive forum provisions.8 Union plans can also be expected to oppose exclusive forum provisions.9 Large institutional asset manager groups, like Blackrock, Vanguard Group, Fidelity and State Street Global Advisors (State Street), are generally more likely to support management sponsored exclusive forum proposals. Their voting guidelines are often silent on the issue, but their proxy voting records evidence support for exclusive forum proposals. The Proxy Voting and Engagement Guidelines for State Street include exclusive forum provisions among the routine matters that State Street generally supports.
Several public companies have succeeded in getting stockholder support for exclusive forum provisions in their governance documents. According to ISS’ records, from 2011 through November 2014, 18 of 20 Russell 3000 companies with management proposals to adopt Delaware exclusive forum provisions received stockholder approval.10 It has also become accepted practice for companies filing for IPOs to include exclusive forum provisions in their charters or bylaws before they go public.
A second potential concern is whether the act of adopting an exclusive forum provision will lead to litigation. The Chevron decision has significantly addressed the risk of being sued merely for adopting an exclusive forum provision.11 For example, the Chevron litigation involved virtually identical claims brought in different actions against 12 different companies as a result of their having adopted exclusive forum bylaws. Ten of the 12 companies repealed their bylaws. The two that didn’t prevailed in the litigation. The litigation risk, at least in the context of facial validity of the provisions, is no longer a concern for Delaware corporations that have properly adopted exclusive forum provisions. According to one source, 112 Delaware corporations adopted exclusive forum bylaws between June 25, 2013, when Chevron was decided, and October 31, 2013.12
But what about simply adopting an exclusive forum bylaw amendment instead of a charter amendment? Charter amendments appear to fare better with proxy advisory firms after adoption than bylaw amendments. The ISS 2015 Guideline Updates introduce a new policy that ISS will generally recommend a vote against or withhold from directors individually, committee
- A review of voting records of CalPERS, CALSTRS, the Employees Retirement System of Texas, and Connecticut State Pension Fund indicates complete opposition to exclusive forum provisions, except with regard to the shareholder vote at one company. A Wall Street Journal article indicates that the New York State Common Retirement Fund also generally votes against exclusive forum provisions. In addition, Key West Police & Fire Pension Fund were named plaintiffs in the Chevron litigation.
- See, e.g., AFL-CIO Proxy Voting Guidelines. Boilermakers Local 154 Retirement Fund was a named plaintiff in the Chevron
litigation. Laborers’ Local No. 1174 Pension Fund was a named plaintiff in one of the parallel litigations.
- See publicly issued Letter of CII to Norman M. Monhair, Chair, Section of Corporation Law, Delaware State Bar Association, dated November 25, 2014.
- See note 5 above regarding relevance of the Chevron decision to exclusive forum charter provisions.
- See Claudia Allen, Trends in Exclusive Forum Bylaws, The Conference Board Governance Center (Jan. 2014).
members, or the entire board, if the board amends the company’s bylaws or charter without stockholder approval in a manner that materially diminishes stockholders’ rights or could adversely impact stockholders. This policy is easily broad enough to pick up exclusive forum bylaws. Similarly, the Glass Lewis Guidelines indicate that Glass Lewis will recommend that stockholders vote against the governance committee chair of companies that have adopted exclusive forum bylaws without stockholder approval. Exclusive forum charter amendments (adopted post IPO) 13 will not contravene these policies.14
Companies that have adopted exclusive forum charter amendments (post IPO) are intuitively less likely to face stockholder proposals to repeal the amendments than companies that have adopted exclusive forum bylaws.15 The typical voting standard for a charter amendment in Delaware is a majority of outstanding shares. This is a higher voting standard than the typical voting standard for a bylaw amendment, which is a majority of shares present and entitled to vote.16 Stockholders that object to exclusive forum provisions will presumably be weary of putting forward proposals to repeal provisions that have been adopted with the support of holders of a majority of outstanding shares. Moreover, any stockholder proposal to repeal a Delaware corporation charter amendment would have to be precatory, given the inability of stockholders to unilaterally amend charters.
Adopting a charter amendment at an annual meeting also lends itself to creating a good board record and governance process, and to avoiding the potential claim that the exclusive forum provision was not adopted on a “clear day.” Failure to adopt exclusive forum bylaws on a clear day was the basis for invalidating exclusive forum bylaws in a recent Oregon decision.17 If exclusive forum provisions are proposed at an annual stockholder meeting, the board can do the necessary advance planning to ensure a decision-making process and record that adequately show that the exclusive forum provisions are not being adopted out of director self-interest.
In summary, as companies start planning for their 2015 annual stockholders meetings, now is the time for boards to evaluate whether to seek stockholder approval of exclusive forum charter amendments. Enough time has passed since the Chevron decision, and enough companies have adopted exclusive forum provisions, for boards to be able to evaluate the benefits and risks on an informed basis. Some companies may not be confident of achieving the necessary level of stockholder support, or may be incorporated in states where the case law either does not
- Both the ISS 2015 Guideline Updates and the Glass Lewis Guidelines evidence a concern for exclusive forum provisions that are implemented in connection with an IPO.
- Companies may also be able to avoid contravening the ISS and Glass Lewis policies through committing to submit board-adopted
bylaw amendments for stockholder ratification. However, bylaw amendments have the disadvantages relative to charter amendments described in the next paragraph.
15 In 2012, Chevron received a shareholder proposal to repeal its exclusive forum bylaws. Several other companies received similar proposals that year. Chevron defeated the proposal. According to its Form 8-K, 38.2% of votes cast supported the proposal, and 61.8% voted against it.
- These standards are the default voting standards under Delaware law, and are subject to change under the charter or bylaws, as
applicable. Note also that when ISS evaluates the level of stockholder support for stockholder proposals, it follows a “votes cast” standard. ISS may recommend a vote against individual directors, committee members or the entire board if the board fails to act on a stockholder proposal that receives a majority of votes cast.
- See Roberts (note 6 above).
support the validity of such provisions, or is unclear. Some companies may already be under stockholder scrutiny with regard to their governance practices, and not want to risk proposing an item that exacerbates the situation. But for companies without these issues that are confident of achieving the necessary stockholder support, an exclusive forum charter amendment proposal may make a lot of sense.
In the United States, each litigant typically bears its own legal fees and expenses. Generally stated, a fee-shifting bylaw or charter provision is one that requires the plaintiff stockholder in an action against the company to pay the company’s legal fees if the plaintiff is not successful. In ATP Tour Inc. v. Deutscher Tennis Bund, the Delaware Supreme Court ruled that a fee-shifting provision in the bylaws of a non-stock corporation was facially valid.18 ATP’s fee-shifting provision provided that in the event a stockholder plaintiff (or certain other parties) “does not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought,” then the plaintiff must reimburse the company its full fees, costs and expenses in connection with the litigation. The court clarified that facially valid fee-shifting provisions could be unenforceable if adopted for an improper use. Shortly after the ATP decision, the Delaware legislature proposed a bill that would deny Delaware stock corporations the authority to adopt fee-shifting bylaws. The bill was later withdrawn and tabled until the 2015 session pending further investigation.
According to CII, as of November 19, 2014, 42 companies have adopted fee-shifting bylaws.19 Some of these adoptions have been in connection with IPOs, such as Alibaba Group Holding Limited, Smart & Final Stores, Inc. and ATD Corporation. Imperial Holdings, Inc. adopted a type of bylaw that prohibits litigation against the company (as opposed to merely requiring company fee reimbursement for unsuccessful litigation), but makes the prohibition inapplicable if stockholders owning at least 3% of the outstanding shares consent to the litigation.20
So what are the issues for companies considering proposing fee-shifting charter amendments at their 2015 annual stockholder meetings? The biggest issue, and one which differentiates fee- shifting provisions from exclusive forum provisions, is the legal uncertainty. ATP involved a fee- shifting bylaw in a non-stock corporation. It is unclear whether the ruling applies to stock corporations.21 Even if it does, there is a risk that the Delaware legislature may act to bar or limit fee-shifting provisions in 2015, at least with respect to stock corporations. 22
- No. 534, 2013, slip op. (Del. May 8, 2014). The decision involved certification of questions of law from the United States District Court for the District of Delaware.
- See this document posted on CII’s website. The list appears to relate to fee-shifting provisions in governance documents of publicly traded entities (and not just in bylaws of public corporations).
- ATD Corporation and Smart & Final are both Delaware corporations. Alibaba is a Cayman Islands corporation. Imperial Holdings
is a Florida corporation.
- There is currently a case, Robert Strougo v. First Aviation Services, Inc., pending in front of Delaware Chancery Court involving a challenge to the validity of a stock corporation’s fee-shifting bylaws.
- In contrast, in September 2014, the Oklahoma legislature adopted a law mandating the shifting of fees in shareholder derivative lawsuits.
Fee-shifting provisions also have an uncertain future with the SEC. The SEC’s Investor Advisor Committee discussed the issue at its meeting on October 9, 2014. At the meeting, Professor John Coffee advocated that the SEC: (i) assert in amicus curiae briefs that federal securities laws preempt the enforcement of fee-shifting provisions, (ii) refuse to accelerate registration statements where the registrant has fee-shifting provisions in its charter or bylaws, and/or
(iii) require registrants to state in their registration statements that they understand that the
SEC believes that the federal securities laws are inconsistent with fee-shifting bylaws. Senator Richard Blumenthal has also urged the SEC to refuse to declare registration statements effective for companies whose governing documents include such provisions.
A second concern for companies is whether stockholders will support adoption of fee-shifting charter amendments. Under the ISS 2015 Guidelines Update and the Glass Lewis Guidelines, ISS and Glass Lewis treat fee-shifting provisions similarly to exclusive forum provisions and can be expected to recommend against them. CII and a coalition of public pension funds are actively lobbying against fee-shifting provisions. They have sent open letters to ISS, Glass Lewis, the Chair, Section of Corporation Law, Delaware State Bar Association, the Governor of the State of Delaware, and a Delaware State Senator, voicing their opposition. It is too early to tell whether large institutional asset managers, such as Blackrock, Vanguard Group, Fidelity and State Street, will support fee-shifting provisions.
Fee-shifting charter amendments therefore seem a lot more risky than exclusive forum charter amendments. For stock corporations, they are of uncertain legal validity in Delaware. The Delaware legislature and the SEC could also take steps to invalidate them or limit their effectiveness. There is also the risk that their adoption could lead to litigation, as happened with exclusive forum provisions prior to the Chevron decision.23 Adoption of this type of provision could be viewed as a breach of the duty of loyalty, given the possibility that the provisions may immunize questionable board conduct from challenge by plaintiffs’ lawyers. Given these considerations, and the lack of any meaningful track record showing how adopters of fee- shifting provisions have fared, many issuers are sitting on the sidelines, at least until the Delaware legislature has had a chance to weigh in. There is a sense that adoption at this time is premature and, even if adoption doesn’t lead to litigation, it could tarnish the board with the reputation of engaging in bad governance.
Companies that do want to push ahead at this time should consider the appropriate nature and scope of the provisions. The following are some of the issues companies may wish to consider:
- Exempting out large stockholders (e.g., those with aggregate holdings in excess of 1%, 2% or 3% of the outstanding shares) or actions that have been consented to by large stockholders— there is a qualitative difference between a stockholder strike suit brought by a plaintiff with only a few shares, and one by a stockholder holding a large position;
- Note that litigation appears less likely than was the case for exclusive forum provisions prior to Chevron, given the litigation deterrent effect of fee-shifting provisions.
- Including the fee-shifting provision in a bylaw, and submitting that bylaw for stockholder ratification—note that if legal developments require amendment or appeal of the fee-shifting provision, a bylaw will be easier to amend than a charter;
- Narrowing the range of persons impacted by the provisions—the scope of the fee-shifting provision in ATP has also been criticized, given its application to persons who “offered substantial assistance” to the losing plaintiff, which could impact, for example, expert witnesses and whistleblowers;
- The standard for success—legal commentators have criticized some free-shifting provisions as making it nearly impossible for stockholders to avoid imposition of fee-shifting even if many of their claims are meritorious;
- The scope of actions—some fee-shifting provisions have been criticized as extending beyond intra-corporate disputes, and potentially picking up external matters, like employment disputes;
- Fee-shifting v. opting out of corporate-benefit doctrine—instead of a fee-shifting charter amendment, corporations could adopt a charter amendment that opts out of the corporate- benefit doctrine. The corporate-benefit doctrine is the doctrine under which successful plaintiffs’ attorneys are awarded fees. Opting out of the corporate-benefit doctrine would preclude the award of fees to plaintiffs’ attorneys in the type of litigation to which the opt-out provision applies (for example in “disclosure only” settlements). This approach does not involve fee-shifting from the corporation to the stockholder plaintiffs, but rather simply removes the fee-shifting from the stockholder plaintiffs to the corporation that takes place under the corporate-benefit doctrine. It is a less aggressive approach to combat the growth in frivolous stockholder litigation, and is therefore less likely to be invalidated by courts.
The above list is obviously not complete, but merely indicates that companies that do want to adopt fee-shifting provisions at this time should give careful consideration to the types of provisions they adopt.