Parallel litigation in multiple forums has become a systemic and growing problem in stockholder class actions and derivative suits.1 Following the announcement of a public company merger or a major corporate setback, representative stockholder plaintiffs, suing directly or derivatively, file multiple actions asserting the same claims for breach of fiduciary duty against corporate officers and directors. Companies and their officers and directors quickly become embroiled in a game of tug-of-war over which forum will take the lead.
The Delaware Court of Chancery is often in the fray. Delaware courts have embraced a policy that disputes involving internal corporate affairs should be decided in the state of incorporation. Delaware courts strongly advocate this policy as promoting the best interests of companies and stockholders in doctrinal predictability and judicial efficiency. Given that nearly one million companies and more than 60% of the Fortune 500 are incorporated in Delaware,2 it is not surprising that Delaware courts have been influential in shaping developments in multi-forum stockholder litigation. Chancellor Strine and Vice Chancellor Parsons of the Court of Chancery each recently co-authored important articles regarding the unique features and challenges of this type of multi-forum litigation.3
This article surveys one aspect of the multi-forum litigation problem—that is, defense strategies to channel litigation into one forum for a merits determination. The primary strategies are motions to stay or to dismiss parallel cases based on considerations of filing priority, forum non conveniens, comity, “one forum” efficiency, and enforcement of forum selection provisions in corporate charters or bylaws. As the law now stands, none of the strategies yields reliably predictable results. Corporate defendants inevitably face a risk of defending duplicative simultaneous or serial cases.
Multi-Forum Stockholder Litigation
A recent article co-authored by Chancellor Strine, Putting Stockholders First, Not the First-Filed Complaint, analyzes the doctrinal origins of multi-forum stockholder litigation.4 The article attributes the phenomenon to several major developments in the law: (1) judicial extension of the reach of personal jurisdiction and the application of the internal affairs doctrine beyond geographical state boundaries,5 (2) development of class actions and derivative suits as frequently used forms of action,6 and (3) federal legislation forcing class action litigation into federal courts where barriers to a plaintiff’s success are relatively high, while leaving litigation involving internal corporate affairs in the hands of state courts.7
As a result of these developments, lawyers representing stockholders have strategic options about where to file suits challenging the fiduciary actions of corporate directors and officers, including the state of incorporation, the corporate headquarters state, and sometimes federal court. Plaintiffs’ law firms compete for control of the litigation by filing separate actions, often staking out positions in different state and federal courts. Plaintiffs and their attorneys need to control claims in order to secure a judicially sanctioned lead plaintiff role, and ultimately seek recovery of attorney’s fees. In light of judicial conventions that support deference to the court with the “first-filed” case, plaintiffs are incentivized to file suit quickly. Delaware courts have lambasted these “fast filer” dynamics as leading to insufficient investigation and prosecution of claims and inadequate representation of stockholders.8
Although these fast-filer dynamics are not new, multi-forum litigation has emerged recently as a hot topic mainly because of the steep increase in “merger objection” class actions filed after the announcement of a proposed sale of a public company. These actions tend to be lawyer-driven and formulaic: a stockholder with relatively modest holdings asserts claims for breach of fiduciary duty by the selling company’s board of directors, alleging a flawed sale process, inadequate price, and deficient disclosures, and threatens to seek a preliminary injunction to hold up the transaction. A recent study indicates that in 2012, almost all acquisitions valued at over $500 million were challenged in litigation, up from about 50% of similarly sized transactions in 2007. In 2012, an average of nearly five lawsuits were filed per deal, with the first filing averaging about 14 days after announcement of the proposed transaction.9 In approximately 65% of the transactions involving sale of a Delaware company, lawsuits were filed in both Delaware and another jurisdiction.10
Relatedly, derivative litigation in multiple forums is attracting heightened interest because of developments in Delaware law regarding the potential for serial suits. A recent decision by the Delaware Supreme Court permits a stockholder to inspect corporate books and records under section 220 of the Delaware Code in order to file a better derivative complaint after dismissal without prejudice for failure to plead demand futility.11 Of potentially greater concern, a 2012 decision by the Delaware Court of Chancery declined to give preclusive effect to dismissal of a derivative suit with prejudice by a federal court in California.12 The Delaware Supreme Court reversed, making clear that full faith and credit requires Delaware courts to give a judgment the same preclusive effect that it would have in the rendering jurisdiction. This decision did not resolve, however, the preclusive effect under Delaware law when a derivative suit is dismissed, with prejudice, for failure to satisfy the Rule 23.1 demand requirement.13
In responding to multi-forum litigation, corporate defendants naturally seek to defend against the claims in a single forum, preferably the forum likely to yield the best defense result.14 But regardless of whether the best forum for defense is Delaware, to the extent that Delaware courts enforce a policy of asserting jurisdiction in intra-corporate disputes, this policy encourages defendants to promote Delaware as the lead court, and to petition other courts to stand down. Otherwise, defendants may be forced to defend in multiple forums.
Delaware courts themselves have an interest in controlling intra-corporate litigation involving Delaware companies.15 The Court of Chancery describes itself as “the nation’s preeminent forum for the determination of disputes involving the internal affairs” of corporations16 and one-fifth of Delaware’s state budget is funded by corporate franchise taxes.17 In a leading case, the Court of Chancery stated its basis for asserting priority in deciding representative litigation involving intra-corporate disputes:
For investors in Delaware corporations, it is important that the responsibilities of directors be articulated in a consistent and predictable way . . . . [R]andom litigation results are not good for investors . . . . It is a very delicate corporate law exercise to determine whether to enjoin a premium-paying merger affecting thousands of stockholders at the instance of stockholders holding a small fraction of the company’s shares. In that respect, it is no insult to the courts of other states . . . to say that the Delaware courts are better positioned to provide a reliable answer about Delaware corporate law in emerging areas like the ones presented by this dispute.18
As then-Chancellor Chandler explained, “Delaware has an ongoing interest in applying our law to director conduct in the context of current market conditions— conditions which change rapidly and pose new challenges for officers and directors of Delaware corporations.”19
Strategies for Channeling Control to One Forum
Against this backdrop of competing interests, a primary objective of defendants is to channel claims into one forum via motions to stay or to dismiss superfluous actions. The United States Supreme Court established that every court has the power to stay proceedings “to control the disposition of the causes on its docket with economy of time and effort for itself, for counsel, and for litigants.”20 The decision to stay a case, however, is a matter of judicial discretion. And discretion can yield unpredictable results.
Courts employ an array of rationales in deciding a request to stay a case in favor of another forum. Those rationales are based on comity and judicial efficiency, and include the first-filed rule and forum non conveniens analysis. Recent innovations include a “one forum” motion and, when applicable, a motion to enforce a forum selection provision in corporate articles or bylaws. These rationales and their strengths and weaknesses are discussed below.
The First-Filed Rule
In exercising discretion to stay or dismiss a suit in light of parallel litigation, courts in several leading jurisdictions rely heavily on the first-filed rule. The first-filed rule is based on the idea that the court in which claims were filed first has jurisdictional priority. As initially conceived, the first-filed rule operated to prevent defendants from defeating a plaintiff’s choice of forum by filing a second suit in another forum.21 Also, the rule initially applied only to actions in the same state, and not to suits pending in multiple jurisdictions.22
Through judicial evolution, courts now invoke the first-filed rule when considering the priority between actions in different jurisdictions.23 As a principle for abating duplicative lawsuits, the first-filed rule avoids wasteful duplication of time, effort, and expense, inconsistent and conflicting rulings, and an “unseemly” race to judgment in competing forums.24 The first-filed rule is easy to forecast, creating a bright line rule for dealing with parallel, duplicative litigation filed by representative plaintiffs.
In Texas and New York (jurisdictions in which a relatively high volume of merger objection suits are filed),25 courts customarily apply a first-filed rule in managing parallel litigation. In Texas, “it is the custom for the court in which the later action is instituted to stay proceedings therein until the prior action is determined, or at least for a reasonable time.”26 This custom “has practically grown into a general rule . . . . Thus, the prudent course is to request a stay of the later action and allow the court in which the prior action is pending to reach a final determination of the issues.”27 Similarly, in New York, courts apply a first-filed rule to “‘avoid duplication of judicial effort, avoid vexatious litigation in multiple forums, achieve comprehensive disposition of litigation among parties over related issues, and eliminate the risk of inconsistent adjudication.’”28
In Delaware, on the other hand, the Court of Chancery does not follow a first-filed rule. A later-filed action in Delaware “will not be stayed as a matter of right” and discretion to stay such an action “should be exercised freely.”29 Delaware courts have embraced a concept that that when multiple suits are filed within a relatively short period of time, the suits should be regarded as simultaneously filed, and any rule of filing priority should be set aside in favor of other considerations in choosing the best forum and the most adequate plaintiff to control the litigation.30 In Delaware’s point of view, insignificant differences in filing time should be disregarded in order to discourage “hastily drafted and barely researched complaints”31 that do not benefit the company or its stockholders. Delaware’s policy has led to more forum conflicts in intra-corporate disputes.32 In effect, if a second action is filed in Delaware, corporate defendants are strategically compelled to prevail upon the court in the first-filed jurisdiction to stay the case in order to permit Delaware courts to decide issues of Delaware corporate law—which sometimes can be an uphill battle.
Delaware’s policy has led to more forum conflicts in intra-corporate disputes.32 In effect, if a second action is filed in Delaware, corporate defendants are strategically compelled to prevail upon the court in the first-filed jurisdiction to stay the case in order to permit Delaware courts to decide issues of Delaware corporate law—which sometimes can be an uphill battle.
In the context of derivative suits, Delaware courts have expressed additional reasons for giving little weight to case filing priority: fast filing undermines Delaware policy to encourage stockholders to make use of pre-suit “books and records” discovery under section 220 of the Delaware General Corporation Law before filing derivative litigation.33 In King v. VeriFone Holdings, Inc.,34 the Delaware Supreme Court held that a stockholder may pursue books and records discovery to attempt to file a stronger complaint after the stockholder’s derivative suit has been dismissed without prejudice for failure to plead demand futility. Although the Court rebuked the plaintiff for filing a derivative action without inspecting corporate books and records first, the Court nonetheless allowed the plaintiff to take another bite at the apple, thus opening the door to serial derivative cases that “litigate repeatedly the issue of demand futility.”35
Judicial comity provides grounds to support judicial discretion to respect the policy of Delaware courts to take priority in deciding cases involving the internal affairs of Delaware companies, even if the first case is filed outside Delaware. Judicial comity is the respect that courts of one jurisdiction show to another by giving effect to the other’s laws and judicial decisions,36 and is a cornerstone of the discretionary power to stay proceedings in deference to proceedings in another jurisdiction. In California, for example, another jurisdiction in which merger cases are often filed,37 courts recognize that their discretionary power to stay proceedings includes considerations of comity, and have stayed first filed cases in deference to parallel Delaware litigation. Courts have discretion to stay proceedings to avoid “unseemly conflicts with the courts of other jurisdictions,” and may consider “whether the rights of the parties can best be determined by the court of the other jurisdiction because of the nature of the subject matter[.]”39
Forum Non Conveniens
The doctrine of forum non conveniens provides another rationale on which courts may stay litigation that has been, or could be, filed in a more appropriate forum. As described in the Second Restatement of Conflict of Laws, forum non conveniens is the concept that a “state will not exercise jurisdiction if it is a seriously inconvenient forum for the trial of the action provided that a more appropriate forum is available to the plaintiff.”40 This rationale, however, has limited utility in intra-corporate disputes. The doctrine is grounded in geographical convenience which has little relevance in identifying the forum most appropriate for deciding a stockholder class action or derivative suit based on intra-corporate fiduciary duty claims.41
A traditional forum non conveniens analysis involves balancing public factors, such as the competing interests of the jurisdictions in the litigation and the “avoidance of overburdening local courts with congested calendars,” with the private interests of the parties which “make trial and the enforceability of the ensuing judgment expeditious and relatively inexpensive.”42 The private factors include issues such as access to proof, the availability of compulsory process, and the enforceability of a judgment.
For corporate defendants, it can be difficult to prevail on a motion to stay based on a forum non conveniens analysis when the company is headquartered in the forum state because it is easy for plaintiffs to marshal a long list of forum contacts. Although physical location is generally unimportant in a fiduciary duty case, it can be hard to convince a court to prioritize a list of convenience factors in a way that makes sense for the case. For this reason, Putting Stockholders First proposes an amendment to the Second Restatement of Conflict of Laws to establish a presumption in intra-corporate actions so that choice of law (i.e., law of the state of incorporation) has primary significance in resolving forum conflicts.43
The Federal Colorado River Doctrine
Federal courts frequently are among the multi-forum filings in stockholder litigation, both in merger class actions and in derivative suits. Members of the plaintiff’s bar have acknowledged the “familiar pattern” in merger class actions where “tag along” actions are filed in federal court asserting the same claims filed in state court, but adding a federal securities claim for proxy violations in order to obtain federal jurisdiction.44 Similarly, plaintiffs often file derivative suits in both state and federal court after announcement of negative corporate events. Plaintiffs allege state law mismanagement claims against the directors and officers for causing alleged corporate losses and add securities claims in federal court.45
In managing multiple federal court filings, the Judicial Panel on Multidistrict Litigation (JPML) is empowered to transfer actions “to any district for coordinated or consolidated pretrial proceedings,” on the motion of a party or on the JPML’s own initiative.46 But when parallel cases are filed in state and federal courts, federal courts must rely on their inherent power to stay proceedings “to control the disposition of the causes on its docket with economy of time and effort for itself, for counsel, and for litigants.”47
In determining whether to exercise discretion to stay a federal action in favor of parallel state proceedings, federal courts look to the Colorado River Doctrine, which is a set of factors including consideration of filing priority and other factors similar to a forum non conveniens analysis.48 The Colorado River Doctrine factors include convenience of the federal forum, avoiding piecemeal litigation, the order in which jurisdiction was obtained by the concurrent forums, whether federal law or state law provides the rule of decision on the merits; whether the state proceedings are adequate to protect the federal litigant’s rights; and whether exercising jurisdiction would promote forum shopping.49
Even assuming that defendants convince a federal court to stay the action on state law claims in light of these factors, some federal jurisdictions decline as a matter of policy to stay federal claims over which they have exclusive jurisdiction—including federal securities claims on which plaintiffs typically rely in merger and derivative cases.50 When a federal court is in the multi-forum mix, the defendants’ best option may be to attempt to coordinate the proceedings if a complete stay of the federal case is not achievable.
The One-Forum Motion
Defendants have deployed a variant of the traditional stay motion in recent merger cases. Under this variant, defendants file “one forum” motions in all relevant jurisdictions requesting that the courts confer and permit the litigation to proceed in a single jurisdiction, while staying or dismissing litigation in the alternate jurisdictions.51 This approach is designed to avoid offending non-Delaware judges by suggesting that defendants prefer to litigate in Delaware.52 In practice, however, a “one forum” motion risks the possibility of litigation in a potentially less desirable forum,53 or may result in coordinated simultaneous proceedings rather than narrowing the field to a single forum.54
Former Chancellor Chandler supported use of one-forum motions,55 but current members of the Court of Chancery have commented that they lack “utility,” provide a “pretext for courts who want to cling to cases for the wrong reasons,”56 and encourage defendants to “really punt on the question” about which forum should decide the merits of the case.57
Forum Selection Articles and Bylaws
In In re Revlon, Inc. Shareholders Litigation,58 Vice Chancellor Laster suggested another innovative solution to the problem of multi-forum stockholder litigation: that is, adoption of forum selection clauses in corporate charters. A recent empirical study shows that, in the fifteen months after Revlon was issued on March 15, 2010, the number of publicly traded companies with intra-corporate forum selection clauses in charters and bylaws had quadrupled from 16 to 133, and was accelerating.59 This approach borrows from choice of venue provisions commonly found in corporate contracts.60
Judicial enforcement of corporate forum selection clauses, however, is off to a rocky start. A federal court in California refused to enforce a forum selection bylaw in a derivative suit, citing the fact that the board of directors had adopted the bylaw after the alleged underlying breach of duty had occurred.51 Subsequently, plaintiffs’ firms filed a dozen class action complaints challenging forum selection bylaws or proposals to adopt bylaws. Some defendant companies withdrew their bylaws or proposals and other cases are awaiting decision.52
Other companies, meanwhile, are seeking to amend their corporate charters by stockholder vote to include a forum selection provision. With stockholder buy-in, charter provisions may stand a better chance of enforcement than board approved bylaw provisions.53 The process for including a forum selection provision in a charter is comparatively simple for pre-IPO companies, but harder for companies already trading which may face stockholder opposition. The bottom line is that it remains to be seen whether forum selection charter and bylaw provisions will become prevalent and widely enforced.
Multi-forum litigation in the context of class actions and derivative suits involving internal corporate affairs presents an intractable problem with no fully predictable and reliable solution. The interests of stockholders and companies represented by plaintiffs in these actions are not served by the filing of multiple suits, while corporate defendants and courts are burdened by the costs and inefficiencies of duplication and potentially conflicting rulings. Courts and practitioners must continue to work to find and enforce fair and reliable solutions.