In recent years, virtually every merger and acquisition (M&A) transaction of significant size involving a U.S. public company has been challenged in court. According to a recent study by Matthew D. Cain and Steven M. Davidoff, in 2013, shareholders challenged a record 97.5 percent of M&A transactions that targeted U.S. public companies where the value of the transaction was more than $100 million and the offer price was at least $5 per share. By contrast, in 2005, only 39.3 percent of such transactions generated a lawsuit. These statistics demonstrate a stark reality: Do a deal, get sued.
A company that pursues an M&A transaction should not only expect to be sued, but to be sued in multiple jurisdictions. Shareholders who wish to challenge the proposed terms of an M&A deal can sue in a state or federal court located in either the target company’s state of incorporation (often Delaware) or the location of the company’s headquarters. According to Cain and Davidoff, between 2005 and 2013, the average number of lawsuits brought per deal jumped from 2.2 to 6.9, and the percentage of deals subject to multi-jurisdiction litigation increased from 8.3 percent to 41.6 percent, reaching a peak of 53.0 percent in 2011.
In response to these trends—and concerns that multi-forum litigation concerning the same deal is inefficient and costly—more than 250 publicly traded corporations have adopted forum selection bylaws that require all shareholder litigation relating to corporate governance occur in the corporation’s state of incorporation. This strategy was suggested by Delaware Vice Chancellor Travis Laster in a 2010 opinion. However, a year later, in the first written opinion to address a forum selection bylaw, a California federal judge refused to enforce the bylaw because it was purportedly adopted without shareholder consent.
The tide turned on June 25, 2013, when Chancellor Leo E. Strine Jr. (who was recently confirmed to become the Chief Justice of the Delaware Supreme Court) issued his ruling in Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013), which upheld forum selection bylaws adopted by Chevron Corporation (Chevron) and Federal Express (FedEx). The plaintiffs argued that the bylaws: (1) exceeded the boards’ authority under Section 109 of the Delaware General Corporation Law (DGCL) and (2) were contractually invalid because they were unilaterally adopted by the boards. Chancellor Strine rejected both arguments.
With respect to the boards’ statutory authority to adopt the bylaws, Chancellor Strine began with the statutory language of DGCL § 109(b). The statute states that the bylaws of a corporation “may contain any provision, not inconsistent with law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs and its rights or powers or the rights or powers of its stockholders, directors, officers or employees.” Chancellor Strine held that the forum selection bylaws “easily meet these requirements” because they regulate (1) “the forum in which stockholders may bring suit, either directly or on behalf of the corporation in a derivative suit, to obtain redress for breaches of fiduciary duty by the board of directors and officers,” as well as (2) “the forum in which stockholders may bring claims arising under the DGCL or other internal affairs claims.” Thus, forum selection bylaws relate to the “business of the corporation[s],” the “conduct of [their] affairs” and regulate the “rights or powers of [their] stockholders.”
Chancellor Strine also held that forum selection bylaws are contractually valid and enforceable. He noted that the certificates of incorporation of both Chevron and FedEx authorize their boards to amend the companies’ respective bylaws. Thus, Chancellor Strine found that the stockholders had assented to the bylaw change:
[W]hen investors bought stock in Chevron and FedEx, they knew (i) that consistent with 8 Del. C. § 109(a), the certificates of incorporation gave the boards the power to adopt and amend bylaws unilaterally; (ii) that 8 Del. C. § 109(b) allows bylaws to regulate the business of the corporation, the conduct of its affairs and the rights or powers of its stockholders; and (iii) that board-adopted bylaws are binding on the stockholders.
Under that clear contractual framework, the stockholders assent to not having to assent to board-adopted bylaws. The plaintiff’s argument that stockholders must approve a forum selection bylaw for it to be contractually binding is an interpretation that contradicts the plain terms of the contractual framework chosen by stockholders who buy stock in Chevron and FedEx.
Accordingly, Chancellor Strine concluded that the bylaws were statutorily and contractually valid on their face.
Although he held that forum selection bylaws were facially valid, Chancellor Strine also held that plaintiffs are not precluded from challenging such bylaws, as applied to particular circumstances (a so-called “as-applied” challenge). In M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 15 (1972), the Supreme Court of the United States held that forum selections clauses in contracts are to be enforced unless the party challenging enforcement of the clause “could clearly show that enforcement would be unreasonable or unjust, or that the clause was invalid for such reasons as fraud or overreaching.” Chancellor Strine held that “forum selection bylaws will therefore be construed like any other contractual forum selection clause and are considered presumptively, but not necessarily, situationally enforceable.” A plaintiff may also argue that “the forum selection clause should not be enforced because the bylaw was being used for improper purposes inconsistent with the directors’ fiduciary duties.”
In the first decision to apply Boilermakers, a justice of the New York Supreme Court, Commercial Division followed Chancellor Strine’s lead in holding that a Delaware forum selection bylaw was enforceable (see Hemg Inc. v. Aspen University). This ruling is important because many companies are incorporated in Delaware but have their headquarters in New York, making New York a common alternative forum to Delaware.
The Boilermakers ruling also may encourage corporations to adopt bylaws requiring that shareholder disputes be arbitrated rather than litigated in court. A Maryland state court has upheld the validity of such a bylaw.
Whether such bylaws will continue to survive judicial scrutiny remains subject to debate, but the Boilermakers decision is unquestionably an important step in reducing the burden and expense of multi-forum litigation concerning M&A deals. The statistics already show that the percentage of mergers subject to multi-jurisdictional litigation dropped from 53.0 percent in 2011 to 41.6 percent in 2013, presumably due at least in part to the proliferation of forum selection bylaws after 2010 and Chancellor Strine’s decision upholding them in mid-2013.