A new study from Cornerstone Research demonstrates the benefit of adopting forum selection bylaws. The study reveals that, for the first time since 2008, the majority (60%) of M&A-related litigation was filed in only one jurisdiction, a reversal of the trend that prevailed from 2009 to 2013, when multi-forum litigation was more common. The author attributes this development to widespread adoption of forum selection bylaws (bylaw provisions that require certain types of intra-corporate litigation –typically claims by shareholders for breaches of fiduciary duty, in derivative suits or for other corporate governance-related claims against the company or its management — to be brought in a single forum, usually the company’s state of incorporation). The study reports that over 300 companies adopted forum selection bylaws in 2013 and 2014.
Companies often face litigation regarding intra-corporate matters, particularly in connection with M&A transactions. According to the study, in 2014, 93% of M&A transactions with values over $100 million faced court challenges; the level has been over 90% since 2010. For deals valued over $1 billion, 96% faced litigation. For purposes of comparison, in 2007, only 44% of M&A deals were litigated. When cases are litigated in multiple jurisdictions, the process can be very inefficient and more costly because of the need for multiple counsel, multiple motions and multiple filings in various jurisdictions. In addition, the outcomes in various courts may differ, leaving the company to deal with inconsistent results. As a consequence, there is no lack of motivation for companies to limit litigation to a single forum.
[Sidebar: One telling data point reported in the study is that, of the 78 settlements reached in 2014 for which data were available, almost 80% involved only additional disclosures; only six involved payments to shareholders and seven involved changes to the deal protection terms.]
Forum selection bylaws may not be appropriate in every instance. For example, companies considering adoption of forum selection bylaws will need to assess the risk of potential adverse reactions from the corporate governance community. Some institutional shareholders strongly prefer that material bylaw amendments be submitted for shareholder approval, and companies may want to find out whether their largest institutional holders have positions on forum selection bylaws. Proxy advisory firm Glass Lewis will recommend voting against the chair of the governance committee if a forum selection bylaw is adopted by the board without shareholder approval. However, ISS — which disfavors most unilaterally adopted bylaw amendments and will recommend against directors that adopt them if ISS considers the provisions to be materially adverse to shareholders — will consider bylaw amendments adopting exclusive forum provisions (when the forum is the company’s state of incorporation) on a case-by-case basis, but has indicated that it generally does not consider them to be materially adverse to shareholders.
Another consideration is whether the bylaw will be upheld. Delaware courts have a record (albeit a brief one) of recognizing forum selection provisions. (What a surprise! Delaware courts want cases tried in Delaware!) In 2013, a Delaware Chancery Court upheld a forum selection bylaw provision that selected Delaware as the exclusive forum for intra-corporate litigation. And, to be fair, in 2014, the Delaware Chancery Court even enforced, in part as a matter of judicial comity, bylaws of a Delaware corporation that selected North Carolina (the state of the company’s headquarters) as the exclusive forum. In December 2014, the Delaware Supreme Court, in overturning a lower court determination not to limit the use of information gathered in the course of a “books and records” inspection only to litigation conducted in Delaware, instructed the Chancery Court on remand to take into consideration the company’s forum selection bylaw, even though it had been adopted subsequent to the plaintiff’s filing of his claim. The Supreme Court viewed the bylaw to represent “a non-case-specific determination by its board of directors that internal affairs litigation involving the company should proceed in a single forum.” Courts in several other states, including California, Illinois, New York and Texas, have also enforced the provision, with the result that the litigation proceeded only in the selected forum.
However, some courts that have had to decide whether to enforce the provision (for example, by dismissing the case in that state in favor of the case in the selected forum), the bylaw has not been uniformly upheld. In 2011, a federal district court in California (Galaviz v. Berg, 763 F Supp 2d 1170 (ND Cal 2011)), and, in 2014, an Oregon state court (Roberts v. TriQuint SemiConductors, Inc. (Or. Cir. Ct. Aug. 14, 2014)) refused to enforce provisions that selected Delaware as the exclusive forum. In both instances, timing of adoption was a factor. One basis for the court’s decision In Galaviz was that the bylaw was adopted unilaterally following the alleged misconduct. In Roberts, the court, while not finding the forum selection bylaw invalid on its face, refused to enforce the bylaw on the basis that it was approved at the same board meeting as the merger agreement: “[e]nforcement of the bylaw would not be an issue had the board, at the very least, adopted it prior to any of its alleged wrongdoing, and with ample time for the shareholders to accept or reject the change. [presumably through the use of its right to repeal or amend bylaws]….Ultimately, the closeness of the timing of the bylaw amendment to the board’s alleged wrongdoing, coupled with the fact that the board enacted the bylaw in anticipation of this exact lawsuit….” led the court to find that enforcing the bylaw through dismissal of the Oregon case would be “unfair and unjust.” As a result, companies should keep in mind that the likelihood of enforcement may be enhanced if the bylaw provision is adopted on “a clear day,” prior to the events giving rise to litigation, especially with respect to courts in other states that are asked to enforce the provision.