Florida corporation pushing the envelope with restrictive bylaws?
Photo by Stuart Rankin

How to stop frivolous plaintiff lawsuits?  Since 2010, when Vice Chancellor Laster of the Delaware Court of Chancery noted that “if boards of directors and stockholders believe that a particular forum would prove 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,” many public companies have adopted bylaws provisions restricting frivolous derivative lawsuits.  As the ABA notes, these so called “forum selection bylaws” are extensions of the forum selection clauses that have long been upheld in contracts.

As anyone who has ever worked on a public merger well knows, within hours after a merger is announced, several plaintiff firms will announce an “investigation” and then file a derivative lawsuit (presumably based on the findings of their thorough “investigation”).  Of course, frivolous lawsuits aren’t limited to M&A transactions, but many of these lawsuits follow the same pattern.  As a result, public companies have had continued interest in restricting such lawsuits.  Forcing plaintiffs to sue in Delaware with a forum selection bylaw is one way to help restrict lawsuits.  But, more recently, some companies have become even more creative.  Here is a quick chronological summary of the movement to adopt restrictive bylaws:

  • March 2010 – Vice Chancellor Laster  of the Delaware Court of Chancery suggests forum selection clauses would be valid in charters.  Dozens of public corporations begin adopting such clauses in their bylaws, including Chevron and FedEx.  (In re Revlon, Inc. Shareholders Litigation)
  • June 2013 – Chancellor Strine of the Delaware Court of Chancery upholds forum selection clauses adopted by the Boards of Chevron and FedEx.   (Boilermakers Local 154 Retirement Fund v. Chevron)
  • May 2014 – The Delaware Supreme Court determines that fee shifting bylaws are valid for nonstock corporations under Delaware law because no law prohibits such bylaws.  This bylaw provision changes the traditional rule from each party pays its own costs to “loser pays.”  Clearly, the threat of a plaintiff having to pay a corporation’s legal bills should curtail some of the most frivolous suits.  It is important to note that the Court was merely answering a certified question from a federal court and the defendant was a nonstock corporation, but the holding could apply to all Delaware corporations.  This decision has led to angst among many.  (ATP Tour, Inc. v. Deutscher Tennis Bund)
  • September 2014 – Chancellor Bouchard of the Delaware Court of Chancery upholds a forum selection bylaw where a Delaware corporation selected North Carolina as the exclusive forum (the state where the corporation’s headquarters was located).  (City of Providence v. First Citizens BancShares, Inc.)
  • October 2014Oklahoma becomes first state to adopt a law mandating fee shifting bylaws for derivative suits. 
  • November 2014A Florida corporation adopts a restrictive bylaw provision, whichwould require consent of at least three percent of a company’s shareholders before a derivative lawsuit could be filed. 

As a Florida lawyer, this latest action definitely intrigues me the most.  Earlier this month, a Florida corporation, Imperial Holdings, Inc., announced that it had adopted new bylaws designed to ensure that any shareholder filing a lawsuit on behalf of the company or a class of shareholders has a minimum degree of shareholder support and adequately represents shareholders’ interests.  The new bylaw requires that a shareholder, before filing a lawsuit against the company, its board of directors or its officers, to obtain consents of shareholders beneficially owning at least three percent of Imperial’s common shares.  Imperial calls this bylaw provision a “representative claims” provision. 

As a corporate lawyer, I applaud the creativity of Imperial (and their lawyers), but I am not certain that the bylaw is enforceable under Florida law.  There is usually very little case law interpreting the Florida Business Corporation Act, and this case is no different.  I found no case law permitting a representative claims provision, nor prohibiting it. 

Nevertheless, Florida Statute Section 607.1021 may pose a problem for these types of bylaw provisions. Florida is generally a Model Business Corporation Act state, but with plenty of Florida-specific “tweaks.”  Section 607.1021 is one of those statutes that do not appear in the Model Business Corporation Act.  While the statute doesn’t apply directly to representative claims provisions, it does state that, if authorized by the Articles of Incorporation, the shareholders may adopt or amend a bylaw that fixes a greater quorum or voting requirement for shareholders, but that such a provision may not be adopted, amended, or repealed by the Board.  Clearly, Section 607.1021 does not directly regulate representative claims provisions, but I believe the analysis applied by a Florida court would be similar to the principles set forth in Section 607.1021: If shareholders want to limit their rights, then shareholders need to provide for that limitation in the articles of incorporation. 

Imperial likely was concerned with the issue as well, as it is submitting the bylaws for ratification at its next annual meeting.

I think that if a representative claims bylaw provision could pass muster in Florida, at the very least, the provision must be contained in the corporation’s articles of incorporation.  The downside of this approach may be that it will be very difficult to get sufficient votes (especially given the unlikely support from ISS and Glass Lewis) from a company’s shareholders to amend its articles to contain a representative claims provision.