Overview. Delaware corporations have been amending their charters or bylaws to provide that derivative litigation and other intra-corporate disputes must be litigated exclusively in the Delaware Court of Chancery. Such clauses respond to concerns regarding plaintiffs' lawyers rushing to sue "anywhere but Delaware," to avoid the predictability and speed of Delaware courts and potentially to obtain larger settlements. This phenomenon may result in Delaware corporations facing parallel, competing litigation in Delaware and another state or in federal court, often in connection with merger transactions. Exclusive forum clauses began to receive heightened attention as a result of Delaware Vice Chancellor Laster's March 2010 opinion in In re Revlon Inc. Shareholders Litig., in which he suggested: "if boards of directors and stockholders 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." The degree to which other courts (often in a corporation's headquarter state, where the court has personal jurisdiction over the corporation) will be willing to respect an exclusive forum clause remains unpredictable.
The April 7, 2011 Study of Delaware Forum Selection in Charters and Bylaws by Claudia H. Allen, Chair of Neal, Gerber & Eisenberg LLP's Corporate Governance Practice Group, analyzes the 82 exclusive Delaware charter and bylaw forum selection provisions adopted to date (or which are in the process of being adopted), and the legal issues associated with such provisions. While exclusive forum clauses generally provide for the Court of Chancery to be the sole and exclusive forum for enumerated categories of actions, the exact language and contours of such provisions are continuing to evolve.
Key Findings and Recommendations:
- 51.2% of the companies in the Study have adopted (or are in the process of adopting) a forum selection provision through a charter amendment. These amendments are being adopted by companies as they go public, emerge from bankruptcy protection or reincorporate in Delaware. In these situations, shareholder approval is generally not required, and shareholders will not have the unilateral ability to amend such clauses.
- Rather than seek shareholder approval of a charter amendment, established public companies have generally adopted forum selection bylaws through board action. 42.7% of the companies in the Study have adopted such bylaws. While shareholders customarily retain power to amend bylaws, there have been no publicly disclosed shareholder efforts to amend or repeal such provisions to date.
- As the 2011 proxy season got underway, four established public companies, all of which are S&P 500 constituents, broke new ground by including management forum selection charter amendment proposals in their proxy statements. Shareholder sentiment on these types of proposals remains difficult to gauge as of the date of the Study, and Institutional Shareholder Services has indicated that it will evaluate these management proposals on a case-by-case basis. Should any of these proposals pass, it is likely that additional companies considering a forum selection clause will consider the shareholder approval route.
- In January 2011, in a case of first impression, the Federal District Court for the Northern District of California in Galaviz v. Berg, refused to dismiss shareholder derivative claims against Oracle Corporation based upon Oracle's exclusive forum bylaw, citing federal common law. The court appears to have been strongly influenced by: (1) the adoption of this provision by the directors who were defendants in the case after the majority of the alleged wrongdoing had occurred, (2) the board taking this action after certain plaintiffs had purchased their Oracle shares and (3) the absence of shareholder approval. The court indicated, in dicta, that it would be more difficult to challenge the enforceability of a charter provision approved by shareholders.
- Notwithstanding the Galaviz decision, the rate at which companies are adopting forum selection provisions has not slowed appreciably.
- Based upon Galaviz, boards adopting bylaw forum selection provisions can lessen some of the potential grounds for attacking the enforceability of such bylaws if they are adopted at a time (for example, in connection with an annual governance review) when adoption cannot be characterized as a response to alleged corporate wrongdoing.
- 38.6% (32) of the companies in the Study have their principal place of business in California, followed by 7.2% (6) in Florida, 7.2% (6) in Illinois and 6.0% (5) in Colorado. There appears to be a correlation between these statistics and the perceived litigation climate in some of those states.
- To maximize flexibility, boards adopting such provisions should consider including a carve-out stating that the board may "consent to the selection of an alternative forum." This language takes into account situations where a board may believe that allowing litigation to proceed in another forum is in the best interests of the corporation. While such carve-outs were not included in the first generation of provisions, they have become increasingly common, and are included in the forum selection provisions adopted by 56.1% of the companies in the Study.
- Future challenges by the plaintiffs' bar to forum selection clauses seem likely, particularly following the Galaviz decision. The degree to which other courts will defer to the Delaware Court of Chancery remains unclear, and may well vary by jurisdiction. As a practical matter, and apart from questions relating to enforceability and investor perception, there does not appear to be a material downside to adopting a forum selection clause.