Since the Delaware Court of Chancery’s March 2010 opinion in In re Revlon Shareholders Litigation, the number of Delaware corporations with an exclusive forum provision in their certificate of incorporation or bylaws has grown from just a handful to over 80.1 The reason for that appears to be Vice Chancellor J. Travis Laster’s statement, in dicta, that “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.”
These exclusive forum provisions generally provide that the Delaware Court of Chancery shall be the sole and exclusive forum for any action or proceeding asserting at least one, if not all, of the following types of intra-entity disputes: (1) any derivative action or proceeding brought on behalf of the corporation; (2) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of the corporation to the corporation or its stockholders; (3) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law; or (4) any other action asserting a claim governed by the internal affairs doctrine.
Corporations adopting these provisions generally cite several benefits to the corporation and its stockholders, including:
- Having disputes resolved by the Delaware Court of Chancery, which is generally regarded as the preeminent court for dealing with complex corporate law issues due to its judges’ deep understanding of Delaware corporate law and its well-established precedent regarding issues of corporate governance;
- Delaware’s well-developed body of case law provides stockholders with more certainty with respect to the outcome of intra-company disputes;
- The Chancery Court is typically able to resolve corporate disputes on an accelerated schedule, limiting the time, cost and uncertainty of protracted litigation;
- By ensuring that intra-company disputes are heard in a Delaware court, the corporation and its stockholders avoid costly and duplicative litigation, the risk that Delaware law would be misapplied by a court in another jurisdiction and the risk of inconsistent outcomes when two similar cases proceed in different fora; and
- Based on the perception among certain practitioners that the Court of Chancery is less tolerant of weak stockholder claims than courts outside of Delaware, exclusive forum provisions may discourage plaintiffs from filing marginal claims against the corporation.
Even though Vice Chancellor Laster only mentioned exclusive forum provisions in charters, almost half of the corporations to adopt these provisions have done so in their bylaws. Of those corporations that have included exclusive forum provisions in their charters, the vast majority do so prior to their initial public offering. For established public companies, the primary advantage of adopting a bylaw provision, rather than a charter provision, is that the board of directors can typically amend the corporation’s bylaws without seeking stockholder approval. Whether courts outside of Delaware will enforce exclusive forum provisions is unclear, as only one challenge has been litigated to date.
In a case of first impression, the U.S. District Court for the Northern District of California refused to enforce an exclusive forum provision contained in Oracle Corporation’s bylaws, denying the defendant’s motion to dismiss for improper venue. The court rejected the argument that bylaws are like any other contract, reasoning that the stockholders did not consent to the board-approved provision as required under contract law. The court was particularly concerned that the provision was approved after the alleged wrongdoing took place, by the same directors who were named as defendants in the case, and without the consent of existing stockholders who acquired their shares before the exclusive forum provision was in effect. The court mentioned, in dicta, that “were a majority of stockholders to approve such a charter amendment, the arguments for treating the venue provision like those in commercial contracts would be much stronger.”
In light of the Oracle case, a number of corporations have decided to seek stockholder approval in an effort to increase the likelihood that their exclusive forum provisions will withstand similar challenges. Three public companies, Altera Corporation, DIRECTV and Life Technologies Corporation, have succeeded in obtaining stockholder approval during the 2011 proxy season. Altera and DIRECTV obtained approval by slim majorities of their outstanding shares and Life Technologies, which combined the exclusive forum provision with other governance changes, received approval from more than 76 percent of its outstanding shares. The Allstate Corporation recently became the first corporation to fail to garner enough support for approval, obtaining approval from less than 42 percent of its outstanding shares.
Opponents of exclusive forum provisions generally argue that the provisions discourage plaintiffs from pursuing derivative claims by forcing them to litigate away from home, thereby increasing the inconvenience, difficulty and cost of litigation. Institutional Shareholder Services, a proxy advisory firm, has commented that exclusive forum proposals are still new and it plans to continue to study them on a case-by-case basis; however, ISS opposed these provisions in all but one instance, Life Technologies, where the proposal was tied to corporate governance changes that helped it win favor.
There is always the chance that a foreign court will refuse to cede jurisdiction to Delaware; however, there appears to be little downside to adopting exclusive forum provisions beyond the costs of preparation and submission to a stockholder vote. Given the potential benefits of litigating in the Court of Chancery, Delaware corporations should give serious consideration to adopting such provisions.
To increase the likelihood that an exclusive forum provision will be enforced and to avoid the uncertainty and expense of having to seek stockholder approval for a subsequent amendment, corporations going public or re-incorporating in Delaware should include these provisions in their initial certificate of incorporation. Similarly, established public companies should consider amending their certificate of incorporation; however, if they are unwilling to seek stockholder approval, at the very least, they should consider amending their bylaws to include an exclusive forum provision. Adopting an exclusive forum provision before any conduct that could give rise to litigation has occurred eliminates one of the factors of concern to the court in the Oracle case and should therefore increase the likelihood that the provision will be enforced.
It remains to be seen whether corporations incorporated outside of Delaware will begin to adopt similar provisions. While there are a few examples of corporations incorporated in other states doing so, there are explanations for why the trend has been slow to spread to the other 49 states. For one, the emergence of this practice was sparked by the dicta in Revlon, but Vice Chancellor Laster’s views may be less persuasive in foreign jurisdictions where the concept of an exclusive forum provision is still novel. Additionally, corporations do not stand to gain as much from selecting a forum outside of Delaware, even if it is the corporation’s state of incorporation, because many of the benefits discussed above are unique to the Court of Chancery. Still, it may be beneficial to know where potential litigation is likely to take place, and given that there is little downside, corporations outside of Delaware should also consider adopting an exclusive forum provision.