For Delaware corporations facing a rising tide of strike suits, the Delaware Court of Chancery’s June 25, 2013 Boilermakers1 decision upholding the validity of "exclusive forum" bylaws adopted by Chevron Corporation and FedEx Corporation2 marked an important milestone. Exclusive forum bylaws require that derivative actions, stockholder class actions and other intra-corporate disputes be litigated exclusively in a specified forum—prior to the decision, almost always the Delaware Court of Chancery. Such provisions are intended to address plaintiff forum shopping and the related phenomenon of plaintiffs’ attorneys filing lawsuits arising out of the same facts in multiple jurisdictions to obtain attorneys’ fees. In particular, these provisions seek to avoid the cost and uncertainty of parallel litigation, the risk of inconsistent outcomes and the potential for Delaware law, which governs these disputes, to be misinterpreted by other courts. Additionally, they are intended to allow Delaware corporations to have intra-corporate disputes resolved by the courts most familiar with the state’s corporate law.3 As suggested in Boilermakers, there is a benefit in having cases "decided in the courts whose Supreme Court has the authoritative final say as to what the governing law means. . . ."4
Multi-forum litigation is most well known in the context of mergers and acquisitions. For example, in 2012, 93% of merger and acquisition transactions valued at more than $100 million resulted in litigation, with an average of 4.8 lawsuits per transaction.
5 For transactions with Delaware-incorporated targets, 65% resulted in multi-forum litigation in Delaware and other jurisdictions, 19% were challenged outside Delaware only and 16% were challenged solely in the Delaware Court of Chancery.6 The most common outcome of such lawsuits was a settlement that provided for the payment of attorneys’ fees and additional disclosure,7 or in some cases, changes in deal protections, but no increase in purchase consideration for stockholders. The entrepreneurial plaintiffs’ bar has also been pursuing lawsuits, modeled on merger litigation, alleging fiduciary breaches by boards of directors in connection with executive compensation matters. The current generation of such lawsuits typically seeks to enjoin annual meetings where stockholders are being asked to cast annual non-binding votes on executive compensation ("say on pay") or approve equity compensation plans. Such litigation tends to be brought outside a company’s state of incorporation.
This article will provide a brief overview of the history of exclusive forum bylaws, followed by an in-depth analysis of: (a) the extent to which Boilermakers has prompted corporations to
adopt exclusive forum bylaws; (b) the specific language being included in such bylaws; (c) litigation testing the enforceability of exclusive forum bylaws and (d) issues to consider before adopting such a provision.
I. HISTORY OF EXCLUSIVE FORUM BYLAWS
As discussed in Exclusive Forum Provisions: Putting on the Brakes, public companies began to adopt exclusive forum bylaws in 2010 through unilateral board action, while companies going public, being spun off, emerging from bankruptcy or otherwise in situations where they were not yet publicly traded, overwhelmingly included provisions in their charters.
8 Unlike bylaws, charter amendments must be approved by both the board and stockholders. Thus, as a practical matter, bylaws are easier to adopt than charter amendments, and may be easily amended by the board to take into account case law developments and refinements. However, stockholders retain the right to amend or repeal bylaws, including exclusive forum bylaws, and bylaws are generally easier to attack than stockholder-approved charter amendments.
Since 2010, charter adoptions have continued unabated, and have become an accepted norm in initial public offerings (IPOs). However, bylaw adoptions ground to a halt in early
2012 after plaintiffs’ firms filed 12 virtually identical lawsuits
in the Delaware Court of Chancery challenging the validity of exclusive forum provisions adopted by large, public corporations.9 Among other things, the complaints asserted that, under Delaware law, the boards of these companies lacked the power to adopt such bylaws without stockholder approval. While 10 of the 12 companies repealed their bylaws, and nine of those companies paid attorneys’ fees as a result, Chevron and FedEx opted to litigate. In Boilermakers, Chancellor Strine unambiguously found that their exclusive forum bylaws were valid both statutorily and contractually.
Consistent with prior statements, the plaintiffs appealed the decision to the Delaware Supreme Court. It appeared likely that the well-reasoned Boilermakers opinion would be upheld.
However, on October 15, 2013, the plaintiffs unexpectedly withdrew the appeal. They seemingly concluded that the Delaware Supreme Court would affirm, creating a binding precedent from a higher level court. Compared to the opinion from the Court of Chancery, such a precedent would make it more difficult to successfully mount an "as applied" challenge to the enforcement of a forum selection bylaw in a non-Delaware court. While the plaintiffs in Boilermakers asserted a number of other claims, including breaches of fiduciary duty,10 the opinion only addressed the facial validity of the bylaws. On October 28, 2013, the plaintiffs moved for an order voluntarily dismissing all remaining claims without prejudice, an option that was not attractive to either defendant. Ultimately, the lawsuit against FedEx was dismissed with prejudice on November 1, 2013,11 while the case against Chevron remains pending. Chevron is in a different position from FedEx since it is facing a parallel case in the United States District Court for the Northern District of California that had been stayed pending the outcome of a Delaware appeal.12 According to the Delaware plaintiffs’ October 28 motion, Chevron wanted to "certify a class and litigate all of the remaining claims."13 Chevron may also be considering whether it is possible to obtain binding precedent.
II. ANALYZING COMPANY RESPONSES TO BOILERMAKERS
A. Level of Bylaw Adoptions.
The plaintiffs’ appeal to the Delaware Supreme Court raised the question of whether corporations interested in adopting an exclusive forum bylaw would await a determination from the Delaware Supreme Court or view Boilermakers as a sufficient basis for stepping off the sidelines. Based on the author’s research, many companies were comfortable acting. The chart below illustrates bylaw adoptions from June 25, 2013–October 31, 2013:
Additionally, five companies planning to go public and two
corporations seeking to reincorporate in Delaware announced plans to adopt exclusive forum bylaws during this period. In total, 112 Delaware corporations (listed on Appendix A) adopted or announced plans to adopt exclusive forum bylaws from June 25, 2013 through October 31, 2013.14 To put these numbers in perspective, during the comparable period in 2012, only one company adopted an exclusive forum bylaw.15
While the statistics above relate to bylaws adopted by Delaware corporations, corporations in other states also appear to be responding to Boilermakers, although to a lesser degree. In Maryland,16 18 corporations or real estate investment trusts adopted (or announced plans to adopt) exclusive forum bylaws during the same period, followed by four corporations in Pennsylvania, two in each of Nevada and Oregon and one in each of Florida, South Carolina, Texas and Virginia. Of these 30 corporations (listed on Appendix B), three are S&P 500 constituents.17
B. Circumstances of Adoption.
Largely consistent with past patterns, 85% of the exclusive forum bylaws analyzed were adopted or proposed by corporations that were already public. In addition, 11% of the bylaws analyzed were (or are being) adopted in connection with IPOs, 2% are being adopted in connection with reincorporation in Delaware, and 1% were
(or are being) adopted in connection with each of a spin-off and emergence from bankruptcy. The percentage of bylaws
being adopted in connection with IPOs reflects an increase from 6.6% as of January 1, 2013.18 It is unclear whether more IPO companies are opting for an exclusive forum bylaw, rather than a charter provision, to provide the board with the unilateral ability to effect future amendments, to appear more stockholder-friendly by providing stockholders with the means to repeal or amend such provisions, or for other reasons. Of the 12 IPO companies analyzed, four included (or plan to include) exclusive forum provisions in both their charters and bylaws, thereby lessening the significance of their exclusive forum bylaws for purposes of this analysis. Additionally, one company that adopted an exclusive forum bylaw announced that it will present the bylaw for approval at its next annual meeting of stockholders. The ratification approach is reminiscent of the ratification approach many companies have taken when adopting poison pills, in response to the policies of Institutional Shareholder Services, Inc. (ISS), the influential proxy advisor.19
C. Consenting to an Alternate Forum.
In Boilermakers, the Court noted that the boards of directors of Chevron and FedEx may consent to being sued in another jurisdiction under their exclusive forum bylaws. Bylaws that permit such optionality are viewed as "elective" and generally begin with the language: "Unless the Corporation consents in writing to the selection of an alternative forum . . . ." The Court in Boilermakers stated that the elective consent language allows boards "to meet their obligation to use their power only for proper corporate purposes."20 In other words, whenever a lawsuit otherwise covered by an exclusive forum bylaw is brought outside the specified forum, the board must make a determination as to whether it is in the best interests of the corporation for the lawsuit to proceed in that alternate forum.21 In some cases, a board might determine that the other forum serves the best interests of the corporation. While some academics and practitioners questioned whether the elective language inequitably allows only the board to select among fora, from the point of view of corporations, that issue has effectively been eliminated by Chancellor Strine’s endorsement. Of the Delaware exclusive forum bylaws adopted after Boilermakers, 97% provide that the board may consent to an alternate forum. The remaining companies adopted "mandatory" forum selection provisions, which do not provide flexibility. As of January 2012, only 64% of exclusive forum bylaws included elective language.22
In connection with future as-applied challenges, plaintiffs
may argue that a board has breached its fiduciary duty by seeking to enforce an exclusive forum bylaw rather than consenting to litigation in the forum chosen by the plaintiffs. In that regard, clearly documenting the board’s rationale for not proceeding in a foreign jurisdiction should be helpful if the issue is raised.
D. Forum and Jurisdiction.
Prior to the wave of lawsuits that began in February 2012, 96% of exclusive forum bylaws adopted by Delaware corporations specified the Delaware Court of Chancery as the exclusive forum.23 After the lawsuits challenging exclusive forum bylaws were filed, and seemingly in response to some of the arguments advanced in the complaint, Chevron amended its bylaw to specify that intra-corporate claims may be brought in any state or federal court in Delaware, and to include a carve-out for situations in which the court does not have jurisdiction over the indispensable parties. Although Fed Ex chose not to amend its bylaw, the Chancellor upheld the validity of both companies’ bylaws.
Of the 112 post-Boilermakers bylaws, only 43% provide that the Delaware Court of Chancery is the exclusive forum, 34% provide that if the specified court (usually the Delaware Court of Chancery or a "state court" in Delaware) lacks subject matter jurisdiction, jurisdiction will vest in another Delaware state or federal court, and 23% take the Chevron approach of specifying the state and federal courts in Delaware. The alternatives highlight a potential downside of only specifying the Court of Chancery—the Court may not have jurisdiction. For example, the federal courts or a different Delaware state court, such as the Superior Court, might have jurisdiction. If the federal courts have jurisdiction, plaintiffs could elect to sue the corporation in the federal district court where it is headquartered or otherwise has sufficient contacts. Those federal courts might not have as deep an understanding of Delaware law as the United States District Court for the District of Delaware. In view of these issues, companies should consider describing the exclusive forum as:
the Court of Chancery of the State of Delaware (or, if the Court of Chancery does not have jurisdiction, another state court located within the State of Delaware or, if no state court located within the State of Delaware has jurisdiction, the federal district court for the District of Delaware).
As to potential personal jurisdiction issues,24 35% of the exclusive forum bylaws adopted after Boilermakers require that the court have "personal jurisdiction over the indispensable parties named as defendants." The comparable percentage in January 2012 was 19%.25 Similarly, 13% of post- Boilermakers bylaws state that the specified court or courts shall have exclusive jurisdiction "to the fullest extent permitted by law," in contrast to less than 1% in January 2012.26 Both of these increases reflect heightened sensitivity to jurisdictional arguments made by the plaintiffs.
In connection with the facial challenge in Boilermakers, Chancellor Strine quickly dispensed with plaintiffs’ arguments as to defects in subject matter or personal jurisdiction:
it bears repeating that in the main, and as the plaintiffs themselves concede, the kind of cases in which claims covered by the forum selection clause predominate are already overwhelmingly likely to be resolved by a state, not federal, court. And as with the issue of personal jurisdiction, the plaintiffs ignore a number of factors that suggest that their hypothetical concern that the forum selection clause will operate unreasonably is overstated.27
However, in the context of future "as-applied" challenges tothe enforceability of exclusive forum bylaws, any defects in jurisdiction will not be "hypothetical." While including additional language addressing potential defects in personal or subject matter jurisdiction may not make a difference in the majority of cases, it could in others. Accordingly, it is important to consider these issues when crafting an exclusive forum provision.
E. Deemed Consent.
Sixty-six percent of the exclusive forum bylaws analyzed specify that any person or entity owning, purchasing or otherwise acquiring any interest in shares of the corporation’s stock "shall be deemed to have notice of and consented to the provisions of this bylaw." This percentage contrasts with 33% as of January 2012.28 Under Delaware law, each of the charter and bylaws is deemed a contract that binds all stockholders.29 Thus, the language appears to be a belt and suspenders effort to ensure that stockholders are bound by the bylaw and that non-Delaware courts where the corporation may be sued are on notice of such consent.30 This language; however, raises potential contract interpretation questions. For example, other important process-oriented bylaw provisions, such as those relating to advance notice of stockholder nominations and business, do not include "deemed consent" language.31 Accordingly, a stockholder could argue that it is not bound by bylaws that do not include "deemed consent" language. Such an argument would, however, conflict with the precept that all stockholders are bound by all bylaws, regardless of when the bylaws are adopted. Arguably, a better solution would be to include a deemed consent clause that covers the bylaws in their entirety.
Lennar Incorporated adopted an exclusive forum bylaw32 with deemed consent language that goes a step further. That bylaw states that stockholders will be deemed to have consented to personal jurisdiction in the Court of Chancery (and other specified Delaware courts) "in any proceeding brought to enjoin any action by that person or entity that is inconsistent with the exclusive jurisdiction provided for" in the bylaw.33 Thus, the Lennar language contemplates that, in the event a stockholder sues outside Delaware, the corporation may also seek an anti-suit injunction against the stockholder in the specified Delaware court. The underlying theory is that any such injunction should be respected in the non-Delaware court. However, the strategy of seeking an anti-suit injunction in Delaware, whether or not the exclusive forum provision explicitly provides for consent to personal jurisdiction in the specified court, may not always work, as exemplified by recent proceedings in a merger lawsuit against Edgen Corporation, discussed in Section III below.
The additional language employed by Lennar raises the question of whether the standard "deemed consent" language in most exclusive forum provisions is sufficient to confer personal jurisdiction. The Delaware Supreme Court has held that where: "the parties to the forum selection clause have consented freely and knowingly to the court’s exercise of jurisdiction, the clause is sufficient to confer personal jurisdiction on a court."34 However, it is not clear whether the standard language reflects the type of free and knowing submission to jurisdiction contemplated by the Delaware Supreme Court, again as evidenced in the Edgen merger litigation.
F. Sole Bylaw Amendment.
Of the 112 companies that have adopted (or indicated an intention to adopt) an exclusive forum bylaw subsequent to Boilermakers, 54% amended their bylaws for the sole purpose of adopting an exclusive forum provision. By contrast, as of January 2012, only 8% of the companies that adopted exclusive forum bylaws did so on a stand-alone basis—generally preferring to bundle exclusive forum amendments with other bylaw amendments.35 The current percentage appears to be another indicator of the relative comfort of public corporations in adopting exclusive forum bylaws.
G.Adoption Prior to Significant Event. Some companies continue to adopt exclusive forum bylaws in advance of, or concurrently with, public announcements of a merger or other event that could result in litigation. For example, on August 26, 2013, HiTech Pharmacal Co., Inc. agreed to be acquired. On the same day, the board amended the company’s bylaws to include a forum selection provision, likely in anticipation of the lawsuits that follow such announcements.36 Air Products and Chemicals, Inc. adopted an exclusive forum bylaw on July 18, 2013.37 On July 31, Pershing Square Capital Management, L.P., the hedge fund, together with affiliated entities, announced that they had acquired a 9.8% beneficial interest in the company.38 Notably, Air Products was one of the ten companies that had repealed a forum selection bylaw after being sued in 2012. Illustrating the changes in practice, Air Products’ new bylaw, unlike the original, specifies that if the Delaware Court of Chancery lacks subject matter jurisdiction, the Superior Court of Delaware, followed by the United States District Court for the District of Delaware will have exclusive jurisdiction. In addition, the bylaw specifies that the board may consent to being sued in another jurisdiction.
As companies continue to experiment with exclusive forum provisions, a number of other clauses have appeared. For example, 4% of the exclusive forum bylaws analyzed specify that a company shall be entitled to injunctive relief and specific enforcement; 4% include severability language, likely with a view toward as-applied challenges; one provision specifies that the forum provision is solely procedural in nature, seemingly in anticipation of arguments that the bylaw deprives stockholders of substantive rights; and, as discussed above, one company has stated that it will present its exclusive forum bylaw to its stockholders for ratification at the next annual meeting.
I. Size of Companies Adopting Provisions.
The market capitalization of companies adopting exclusive forum bylaws ranges from less than $100 million to more than $85 billion, indicating interest from both the smallest and largest public companies. Market capitalizations for 100 of the 112 companies analyzed are available on Yahoo Finance. As shown below, the bulk of those companies have market capitalizations below $5 billion:
J. Principal Place of Business.
The largest percentage of the 112 companies are headquartered in California (26%), followed by Texas (12%), New York (10%), and Arkansas, Illinois, Massachusetts and New Jersey (each, 4%). Corporations headquartered in 21 other states have adopted exclusive forum bylaws since June 25, 2013. The high percentage of corporations headquartered in California is consistent with the high percentage identified in previous analyses of exclusive forum provisions.39 The extent to which these percentages correlate with perceived litigation climates is unclear.40
III. ENFORCEMENT AND "AS-APPLIED" CHALLENGES
Although the Court of Chancery found that the Chevron and FedEx exclusive forum bylaws were valid, future skirmishes between plaintiffs and corporations are likely to take place in courts outside Delaware, when defendants seek to dismiss or stay cases based on exclusive forum provisions—and plaintiffs then challenge the enforceability of such provisions.41 Enforcement disputes could also spill over into Delaware, as described below.
Delaware forum selection bylaws, like other forum selection clauses, should be "construed like any other contractual forum selection clause and [be] considered presumptively, but not necessarily situationally, enforceable,"42 according to Boilermakers. Plaintiffs may rebut this presumption by showing that enforcement is unreasonable or unjust.43 Plaintiffs may also allege that the board breached its fiduciary duties in enforcing44 or adopting a bylaw. Accordingly, exclusive forum provisions are not self-enforcing, a point often overlooked by opponents. Courts in jurisdictions outside Delaware where lawsuits are filed will undertake situational reviews.
The existing case law concerning the enforceability of exclusive forum provisions in bylaws (or charters) is scant and inconsistent. This is not surprising, given that such provisions are relatively new. In Galaviz v. Berg,
45 the first litigated as-applied challenge to a forum selection bylaw, the United States District Court for the Northern District of California declined to dismiss a stockholder derivative action against Oracle on the basis of its mandatory forum selection clause. The Court, in this 2011 case, focused upon the fact that the bylaw was unilaterally adopted by the board after the majority of the alleged wrongdoing occurred and without the consent of stockholders who had purchased shares before the amendment. On the basis of federal common law, the Court found that the bylaw
did not bind stockholders, since it had been adopted without stockholder consent.
46 The Court did not address whether the provision was valid as a matter of Delaware corporate law. Many practitioners and academics believe that this case of first impression was incorrectly decided, in particular since bylaws customarily provide that they may be amended by the board. In Boilermakers, Chancellor Strine sharply criticized Galaviz as resting "on a failure to appreciate the contractual framework established by the [Delaware General Corporation Law] for Delaware corporations and their stockholders."47
Another litigated as-applied challenge involved an
exclusive forum provision in a certificate of incorporation, and arose in the context of Facebook’s IPO. In a February 2013 ruling, Judge Sweet of the United States District Court of the Southern District of New York denied a motion to dismiss four IPO derivative actions against Facebook on the basis of the exclusive forum provision in its charter.48 The Court denied the forum selection motion on narrow technical grounds—the amended charter containing the forum clause was not filed with the Delaware Secretary of State until four days after the IPO. Thus, the provision was not in effect when shares were purchased in the offering. Moreover, since the Court dismissed the cases on other grounds, it did not need to wade into a controversial area:
The Court recognizes the considerable debate on
the efficacy, enforceability and desirability of the use of exclusive forum provisions and declines to advance any position here.49
On February 15, 2013, in Daugherty v. Ahn, 50 a derivative action brought in Texas against Furmanite Corp., the Texas court granted a motion to dismiss on the basis of Furmanite’s mandatory exclusive forum bylaw, adopted in 2006. That bylaw, which predates the current generation of provisions, is much like Oracle’s, and only addresses derivative actions:
Venue for Derivative Suits. Any derivative action or proceeding by or in the name of the Corporation shall be brought only in the Chancery Court of the State of Delaware.
The case involved allegations of inadequate internal controls and violations of the Foreign Corrupt Practices Act, thus highlighting that exclusive forum provisions are relevant in more than the merger and acquisition context.
On October 1, 2013, Edgen entered into a definitive agreement to be acquired by Sumitomo Corporation. On October 11, the company was sued in Louisiana,51 where the company is headquartered. Edgen filed a motion to dismiss in Louisiana based on the mandatory forum clause in its charter. In addition, Edgen, concerned about timing, filed a complaint against the Louisiana plaintiff in the Delaware Court of Chancery, based upon its exclusive forum provision. Edgen sought an anti-suit injunction that would enjoin the plaintiff from prosecuting his claims in the Louisiana action.52 Edgen appears to be the first company to employ this strategy. The case was assigned to Vice Chancellor Laster who characterized the plaintiffs’ claims as "an exceedingly weak challenge to a deal."53
He found that Edgen had stated a colorable claim since the claims in the Louisiana case were within the scope of the exclusive forum provision and the stockholder had facially violated the forum provision. He also found irreparable harm sufficient to support an injunction, since violating a forum selection clause constitutes irreparable harm under Delaware precedent. However, in balancing the equities, he declined to issue an injunction for two primary reasons: (a) potential questions about personal jurisdiction over the plaintiff and (b) concerns over the "aggressive" means by which the company was pursuing enforcement and related concerns regarding respect for other courts.
As to personal jurisdiction, Vice Chancellor Laster stated that the absence of an explicit reference to personal jurisdiction created a "litigable issue." 54 With respect to deferring to the court in which litigation was commenced, Vice Chancellor Laster emphasized that Boilermakers contemplated that the enforceability of an exclusive forum clause: "would be considered in the first instance by the other court, by the court where the breaching party filed its litigation, not through an anti-suit injunction in the contractually specified court."55 Moreover, he noted that proceedings in Louisiana scheduled for the next day lessened the need for immediate action. Although he declined to issue an injunction, Vice Chancellor Laster stated: "It may be that in the right case an anti-suit injunction is appropriate . . . ."56 The Louisiana court has since set December 13, 2013 as the hearing date for Edgen’s motion to dismiss.57
Additionally, an October 2012 stockholder class and derivative action against MetroPCS Communication, Inc., which has an exclusive forum bylaw remains pending in Texas.
58 The litigation arose from a business combination involving MetroPCS, Deutsche Telekom and T-Mobile USA, Inc. The Texas trial court granted a temporary restraining order with respect to certain aspects of the transaction, without first considering the defendants’ motion to stay or dismiss the litigation on the
basis of its exclusive forum bylaw. However, the Texas Court
of Appeals found that "the trial court abused its discretion by granting injunctive relief without first ruling on . . . motions respecting the forum selection clause in question."59 The Court of Appeals also stated that forcing a party to litigate in a forum different from that provided for in a forum selection clause, and requiring an appeal to enforce the rights granted in that clause is "clear harassment."60 The defendants’ motion to dismiss or stay is scheduled for hearing in February 2014.
IV. CONSIDERATIONS RELATING TO ADOPTION
For corporations that have been involved in multi-forum litigation, the appeal of an exclusive forum bylaw is obvious. For others contemplating adoption of an exclusive forum bylaw, the statistics concerning the incidence of intra-corporate litigation brought outside a corporation’s state of incorporation serve as a powerful incentive to act.
Nonetheless, consistent with their fiduciary duties, boards must thoughtfully evaluate whether a forum selection bylaw would be in the best interests of the corporation and all of its stockholders. In Boilermakers, the plaintiffs alleged that board adoption of an exclusive forum bylaw was self-interested, so it is important to create a record establishing an independent, informed and balanced consideration of whether to adopt an exclusive forum bylaw. As part of its analysis, the board should evaluate whether there are reasons to favor litigating in a company’s headquarters state and whether the status quo may be a superior option. For corporations formed outside Delaware, determining whether to adopt an exclusive forum bylaw will also involve assessing the quality of the state courts that would be specified.
As a practical matter, boards should analyze the views of their stockholders on exclusive forum provisions. Some institutional investors support exclusive forum bylaws, while others object on the theory that such provisions deprive investors of an important right. Notably, over time, some institutional investors who originally opposed exclusive forum provisions have changed their views, recognizing that strike suits are effectively a tax on their investments. Companies should review the proxy voting guidelines of their institutional investors, Forms N-PX revealing how they voted in the prior proxy season and the extent to which they follow the voting recommendations of ISS and/or Glass Lewis & Co. Both proxy advisors generally oppose company proposals to adopt exclusive forum provisions, although they technically make case-by-case determinations. 61 Glass Lewis takes its opposition one step further by recommending against the election of the governance committee chair, if during the past year, the board adopted a forum selection clause without stockholder approval.62 The reaction of stockholders to proposals seeking the repeal of exclusive forum bylaws provides evidence that stockholders are listening to what well-run corporations have to say about the costs of multi-forum litigation. In 2012, Amalgamated Bank LongView Funds submitted four non-binding repeal proposals. Amalgamated Bank describes itself as "America’s Labor Bank." In response, two of the targeted companies repealed their bylaws, while Chevron and United Rentals, Inc. took the proposals to their stockholders and defeated the proposals by almost a two-to-one margin. It is unclear whether there will be any repeal proposals this season. But the results of the Chevron and United Rentals votes indicate that providing stockholders with a balanced and thoughtful explanation of a company’s reasoning can be persuasive.
Additionally, boards should be aware that exclusive forum bylaws are relatively new and case law is only beginning to develop. When corporations seek to enforce such provisions in non-Delaware courts, the provisions will be subject to situational reasonableness review and likely challenges from plaintiffs. Although arguments in favor of enforcement are strong, there can be no guarantee that a non-Delaware court will enforce a bylaw providing that the exclusive forum will be in Delaware, and courts in different jurisdictions may reach inconsistent conclusions.
Companies should carefully consider whether to adopt an exclusive forum bylaw, taking into account the issues discussed above, as well as the timing of adoption. For companies that are already public, exclusive forum bylaws represent the best tool currently available to address the phenomenon of strike suits for which stockholders pay—either directly or indirectly. Boilermakers serves as an important endorsement of the underlying soundness of exclusive forum bylaws. Action is now likely to move to courts in other states as plaintiffs challenge the enforcement of these provisions. The reaction of non-Delaware courts to these provisions, particularly in states such as California, will be a key determinant of their success.