More and more plaintiff lawyers are suing issuers outside of an issuer’s state of incorporation, which requires issuers to defend substantially identical claims in multiple forums at added expense with little to no benefit to the shareholders. While plaintiff lawyers enjoy this lucrative source of revenue, the increasing amount of time and money expended on this multiforum shareholder litigation drives the need for a creative solution for issuers. A 2010 Delaware court decision, provided such a solution by suggesting that Delaware corporations could amend their organizational documents to provide that Delaware courts are the exclusive jurisdiction for settling intracorporate disputes, including derivative claims. Thus, dozens of issuers have adopted so called “forum selection” clauses in their bylaws. Generally, these clauses are similar to Chevron’s:
Unless the Corporation consents in writing to the selection of an alternative forum, the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Corporation, (ii) 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 the Corporation’s stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, or (iv) any action asserting a claim governed by the internal affairs doctrine shall be a state or federal court located within the state of Delaware, in all cases subject to the court’s having personal jurisdiction over the indispensible parties named as defendants. Any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of the Corporation shall be deemed to have notice of and consented to the provisions of this Article VII.
And while the 2010 Delaware court decision suggested these clauses were permissible, it was not until earlier this year that a Delaware court specifically ruled that the forum selection clause adopted by Chevron was valid. Although the Delaware Supreme Court hasn’t ruled on the issue (the plaintiff dropped its appeal in the Chevron case), it is clear that Delaware corporations have the power to adopt these forum selection clauses. What is not clear is whether corporations incorporated outside of Delaware can or should consider adopting forum selection clauses.
In my opinion, for most corporations incorporated outside of Delaware, there is little incentive to adopt forum selection bylaws. While all corporations, regardless of where incorporated, have an interest in avoiding the costs of multiforum shareholder litigation, most states do not have well settled corporate law. For example, interpreting anything under the Florida Business Corporation Act often seems to be somewhat of a guessing game. Florida corporations don’t have as much “upside” in keeping the litigation in Florida as Delaware corporations have in keeping things in Delaware. Of course, a Florida corporation would receive a benefit by having to defend only one suit in Florida rather than several around the country.
On the other hand, there is lots of “downside” risk to adopting forum selection bylaws. ISS and Glass Lewis are both very much opposed to forum selection bylaws, especially if the Board adopts the bylaw provision without a shareholder vote (in which case, Glass Lewis may recommend a “withhold” vote on the director serving as Chairman of the Governance Committee). Given the negative views from ISS and Glass Lewis, it may not be worth picking a fight over the issue. Further, the “first mover” in a particular state may have to deal with the litigation costs to have a state court rule that forum selection bylaw provisions are even permissible under that state’s laws. Being the “first mover” could also get the attention of one of the shareholder activists for a shareholder proposal.
But, if a non-Delaware corporation is constantly under the threat of multiforum shareholder litigation or considering a sale of the corporation (which nearly always leads to shareholder litigation), then it may make sense for the corporation to “lead the charge” to implement forum selection bylaws in its state.