The increasing number of corporations adopting bylaws or charter provisions mandating that intra-corporate lawsuits be brought exclusively in a particular forum has provoked a preemptive strike by the plaintiffs bar. Between February 6 and 23, 2012, two law firms acting together filed at least 12 separate lawsuits1 in the Delaware Court of Chancery challenging the validity of bylaws adopted by various corporations. These lawsuits seek declarations that the exclusive-forum bylaws at issue are invalid and unenforceable and that the directors of the various defendant companies breached their fiduciary duties by adopting them. Although these cases have only recently been filed and there is nothing more than their complaints to consider at this time, a review of the arguments plaintiffs make against exclusive-forum provisions may help guide those considering the adoption of such provisions in the near term.
1. The Forum Bylaw Lawsuits Address a Relatively Uniform Set of Exclusive-Forum Bylaws
Each of the defendant companies in the forum bylaw lawsuits adopted its exclusive-forum bylaw during 2010 or 2011 in the wake of the Delaware Court of Chancery's decision in In re Revlon Shareholders Litigation, 990 A.2d 940 (De. Ch. 2010). In that decision, Vice Chancellor Laster noted that greater oversight by the Chancery Court of firms that are frequent filers of shareholder litigation could result in those firms filing their lawsuits in other jurisdictions. Vice Chancellor Laster opined that, if this occurred "and if the boards of directors and stockholders believe that a particular forum would provide an efficient and value-promoting locus for dispute resolution, the corporations are free to respond with charter provisions selecting an exclusive forum for intra-entity disputes."2 Around the same time (2010-2011), the number of multi-jurisdiction shareholder lawsuits — instances in which different shareholders file lawsuits in distinct jurisdictions over the same corporate actions — have been on the increase. Accordingly, over the last two years, more and more companies have accepted Vice Chancellor Laster's invitation to adopt corporate bylaws or charter provisions selecting an exclusive forum for intra-corporate dispute resolution. While the total number of publicly traded corporations with some type of exclusive-forum provision is still relatively small, it is much larger than it was only a few years ago.3 Yet, there is little case law on the permissible scope of such provisions or the proper means for adopting them. The forum bylaw lawsuits may provide the first real guidance as to the enforceability of specific exclusive-forum provisions under Delaware law. That guidance may prove to be limited though.
The plaintiffs filing the forum bylaw lawsuits chose to test exclusive-venue provisions that are fairly uniform in genesis and substance. First, each of the bylaws was unilaterally adopted by the company's board, as opposed to by charter provisions enacted before the company has its initial public offering or charter provision approved by the company's shareholders. According to a recent study, the majority of exclusive-forum provisions adopted are in charter provisions (most in the initial public offering context), but a smaller percentage (about one-third) of the exclusive-forum provisions adopted are in corporations' bylaws. Plaintiffs presumably chose to attack only exclusive-forum bylaws because they lack the consent that is explicit when shareholders approve exclusive-forum provision or implicit when shareholders buy stock in a company with a pre-existing exclusive-forum charter provision.
Second, the exclusive-venue bylaws at issue in the forum bylaw lawsuits are largely identical in substance, with only a few significant differences. Each bylaw applies to the same four categories of disputes: (1) derivative actions brought on behalf of the company, (2) claims of breach of fiduciary duties owed to the company or its shareholders, (3) claims arising under the Delaware General Corporation Law, and (4) claims governed by the internal affairs doctrine. There are only two major differences in the language of the provisions at issue. First, two of the bylaws4 provide that they only apply when "the Court of Chancery [has personal] jurisdiction over the indispensable parties named as defendants," while the others have no such exception. Second, all of the bylaws but two5 are so-called "elective forum provisions," which means that they apply unless the corporation or its board of directors consents in writing to the selection of an alternative forum.
2. A Summary of Plaintiffs' Arguments in the Forum Bylaw Lawsuits
The plaintiffs in the forum bylaw lawsuits make a number of arguments against exclusive-venue provisions. Some of those arguments apply only to exclusive-forum bylaws, but many could apply equally to exclusive-forum venue provisions in charters. Below is a summary of the more interesting arguments — both good and bad.6
The bylaws apply to persons not subject to bylaw regulation.
Plaintiffs assert that the exclusive-forum bylaws are impermissible under 8 Del. C. § 109(b), which states that a company's "bylaws 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."7 Plaintiffs argue that "the Bylaw purports to require former stockholders (as well as former directors, officers and employees) to file in the Delaware Court of Chancery any lawsuit raising a claim falling within the Bylaw."8 The example they give is of a former stockholder "who has been cashed out of the Company" by a merger, but is still allowed to bring a claim for breach of fiduciary duty or breach of the Delaware General Corporations Law.9
The bylaws violate statutory limits on the Court of Chancery's subject matter jurisdiction.
Plaintiffs argue that "[i]n enacting and amending [8 Del. C.] § 111, the Delaware General Assembly could have, but did not, give the Court of Chancery exclusive jurisdiction over the various types of actions listed in the statute. Instead, the legislature conferred only non-exclusive concurrent jurisdiction."10 From this non-exclusive grant of jurisdiction, plaintiffs infer that Section 111 "was intended to allow plaintiffs to opt to file in Delaware Superior Court or other courts with jurisdiction over legal claims, particularly where the plaintiff desires a jury trial."11 Plaintiffs claim that this inferred right to opt out of Chancery Court is infringed by exclusive forum provisions and that such provisions essentially confer exclusive "subject matter jurisdiction on the Court of Chancery."12
The bylaws are invalid because they conflict with Federal statutes and impermissibly impinge on Federal jurisdiction.
Plaintiffs argue that "Delaware could not permissibly pass a statute that would reduce or eliminate federal jurisdiction based on original jurisdiction, diversity, bankruptcy, the Securities Litigation Uniform Standards Act of 1998 (SLUSA), or supplemental jurisdiction over state-law claims . . . [and therefore,] Delaware cannot do so indirectly by sanctioning bylaws that effectively limit or eliminate federal jurisdiction in these areas."13 More specifically, plaintiffs argue that the exclusive-forum bylaws (1) make the Court of Chancery the exclusive forum for determining whether provisions of the DGCL, certificate, or bylaws are valid and enforceable under the Constitution of the United States and federal statutes,"14 (2) prevent shareholders from bringing "federal securities claims under Sections 10(b) and 16(b) of the Securities and Exchange Act and under Section 36(b) of the Investment Company . . . in some cases must,[] be brought as derivative claims in federal court,"15 (3) conflict with SLUSA by "forbid[ing] stockholders from bringing a class or derivative action based on such claims in a federal court,"16 and (4) impinge on federal diversity, supplemental, and bankruptcy jurisdictions.17
Forum selection provisions that are unilaterally imposed are subject to judicial scrutiny for fundamental fairness.
Over the course of a couple of counts,18 plaintiffs argue that unilaterally adopted forum selection provisions should be reviewed for fundamental fairness. They contend that unilaterally adopted provisions like those at issue would fail such a review because they are unfair for at least three reasons. First, exclusive-forum bylaws achieve their results in a manner "that could not be achieved under contract law,"19 which provides the basis for most analysis of exclusive-forum provisions. Second, exclusive-forum bylaws unilaterally require shareholders to submit to personal jurisdiction in Delaware Chancery Court for counterclaims (and potential service in unrelated claims) if they want to bring certain claims.20 Third, "elective forum provisions" require shareholders to submit to the exclusive jurisdiction of the Court of Chancery without mandating the same for the company or its board of directors.
The bylaws are invalid because they improperly require that claims be brought in the Delaware Court of Chancery even when it lacks personal jurisdiction over a defendant.
Plaintiffs assert that the exclusive-forum provisions at issue could preclude shareholders from bringing certain claims because the defendants are not subject to personal jurisdiction in Delaware. "Under 10 Del. C. § 3114, personal jurisdiction is available only for directors and certain senior officers and only for claims of breach of fiduciary duty. Thus, for most corporate officers, there would be no personal jurisdiction in the Delaware Court of Chancery . . . . [and therefore,] the Bylaw . . . effectively provid[es] that the stockholders cannot obtain any remedy against certain officers, employees and agents."21
The bylaws are the product of the directors' breaches of fiduciary duty.
The plaintiffs argue that the directors of each defendant company "have a material interest in the Bylaw because it (i) enables them to cause litigation against them to be confined to the forum where they believe they are least likely to be held liable, (ii) enables them to avoid a jury trial and (iii) may make it difficult or impossible for certain claims to be brought against them."22 Therefore, they assert that the adoption of the bylaw is subject to entire fairness review. Plaintiffs argue that, for the reasons set out in the other counts and because the defendant companies did not make sufficient disclosures relating to "the reasons for and effects of the"23 bylaws, the exclusive-forum bylaws fail entire fairness review.
3. The Forum Bylaw Lawsuits Are Not Likely to Resolve the Most Vexing Issues Concerning Exclusive-Forum Provisions
Although some of the arguments made in the forum bylaw lawsuits seem unlikely to get much traction in the Court of Chancery, they may be the impetus for the court to provide some insight into the permissible scope of exclusive-forum provisions or the methods by which such provisions may be adopted. It seems unlikely that the Court of Chancery will reject all such provisions outright. Barring such an outright rejection, the forum bylaw lawsuits will leave open two of the more thorny issues that exclusive-forum provisions create.
First, will other jurisdictions enforce such provisions? To date, only one court has directly addressed the issue of whether exclusive-forum provisions are enforceable. In Galaviz v. Berg, 763 F. Supp. 2d 1170 (N.D. Cal. 2011), the United States District Court for the Northern District of California considered whether "corporate directors [may] control the venue for shareholder derivative actions brought against them by adopting a bylaw purporting to require that such cases be filed in a particular forum?" In Galaviz, the court answered this question in the negative. In reaching this result, the court focused on the fact that the bylaw at issue was adopted by the defendant company's board during the period that the culpable conduct was alleged to be occurring and on the fact that the bylaw was unilaterally adopted. That court rejected the notion that the bylaws were a contract between the shareholder plaintiff and the company because the exclusive forum bylaw was unilaterally adopted. The court then held that there was no basis under federal law for dismissing a federal lawsuit based on state corporate law.
Other courts deciding whether to enforce exclusive-forum provisions will grapple with similar issues. Most likely, such courts will have to decide whether the enforcement of exclusive-forum provisions falls under the auspices of the corporate "internal affairs doctrine" that applies to choice-of-law issues in many states, and if so, whether that jurisdiction has a public policy exception to such choice of law rules that is triggered by exclusive-forum provisions. Many of the arguments summarized here can be repackaged as public policy arguments and may be more persuasive in that context than in the context of deciding whether an exclusive-forum provisions is an allowed and appropriate exercise of the power granted to companies by Delaware law.
Second, the pending Delaware lawsuits will not resolve whether Delaware courts will enjoin shareholders from prosecuting lawsuits in other jurisdictions if those jurisdictions are not willing to enforce exclusive-venue provisions based on public policy or some other issue. In ASDC Holdings, LLC v. The Richard Malouf 2008 All Smiles Grantor Retained Annuity Trust, C.A. No. 6562- VCP, 2011 WL 4552508 (De. Ch. Sept. 14, 2011), the Chancery Court granted a preliminary injunction preventing the defendants in that matter from prosecuting claims they had brought in Texas court because the claims were within the scope of a forum selection clause contained in certain contracts entered into by the parties. A corporation's charter and bylaws are considered contracts amongst the company and its shareholders.24 Therefore, the reasoning of ASDC Holdings, LLC applies to exclusive-forum provisions in corporate charters and bylaws and arguably would allow for a company to enjoin any shareholder that files a lawsuit in contravention of an exclusive-forum clause. The question then is whether Delaware courts would prove willing to foist themselves on the rest of the country systematically by enjoining any such shareholders from prosecuting claims in other forums.
* * * * * * * * * *
Although the forum bylaw lawsuits are not likely to resolve all the issues regarding exclusive-forum provisions, they likely will provide some useful guidance as to the appropriate scope and method of adoption for such provisions. This guidance, hopefully, will help corporations to avoid future multi-jurisdictional shareholder litigation and will provide some consistency to intra-corporate disputes.
Footnotes
1 Those lawsuits filed in the Delaware Chancery Court are Boilermakers Local 154 Retirement Fund v. Priceline.com, No. 7216; Boilermakers Local 154 Retirement Fund, et al. v. Danaher Corp., No. 7218; Boilermakers Local 154 Retirement Fund, et al. v. Curtiss-Wright Corp., No. 7219; Boilermakers Local 154 Retirement Fund, et al. v. Chevron Corp., No. 7220; Sutton v. Autonation, Inc., No. 7221; Singh v. Navistar Int'l Corp., No. 7222; Stead v. Franklin Resources, Inc., No. 7223; City of Sunrise General Employees' Pension Plan v. Superior Energy Services, Inc., No. 7224; Laborers' Local No. 1174 Pension Fund v. SPX Corp., No. 7225; ICLUB Investment Partnership v. Fedex Corporation, No. 7238; Neighbors v. Air Products & Chemicals, Inc., No. 7240; Schellman v. Jack In The Box Inc., No. 7274 (collectively, the "Forum Bylaw Lawsuits").
2 In re Revlon Shareholders Litigation, 990 A.2d 940, 960 (De. Ch. 2010).
3 According to a recent study by Claudia H. Allen the number of exclusive-forum bylaw or charter provisions more than doubled between April 2011 and December 31, 2011. See http://blogs.law.harvard.edu/corpgov/2012/02/14/delaware-corporations-seek-to-counter-forum-shopping/
4 The bylaws of Superior Energy Services, Inc. and Franklin Resources, Inc. are alleged to include exceptions for when there is no personal jurisdiction over a defendant.
5 The bylaws of Air Products and Chemicals, Inc., and Autonation, Inc., are "mandatory forum provisions" as opposed to "elective forum provisions."
6Unless otherwise noted, the analysis in this section focuses on the Verified Complaint in Singh v. Navistar Int'l Corp., No. 7222, which is representative of the lot. That Verified Complaint can be found on Westlaw. Singh v. Navistar Int'l Corp., No. 7222, 2012 WL 485387 (Feb. 6, 2012).
7 (Emphasis added)
8 Navistar Verified Complaint, 2012 WL 485387 at ¶ 50.
9 Id. ¶ 51.
10 Id. ¶ 63 11 Id.
12 Id. ¶ 64.
13 Id. ¶ 89.
14 Id. ¶ 90.
15 Id. ¶ 91.
16 Id. ¶ 96.
17 Id. ¶¶ 97-98.
18 Counts III, IV
19 Id. ¶ 74.
20 Id. ¶¶ 68-.
21 Id. ¶¶ 83-84.
22 Id. ¶ 104
23 Id. ¶ 106.
24 Jana Master Fund, Ltd. v. CNET Networks, Inc., 954 A.2d 335, 338 (Del. Ch. 2008) ("a corporation's bylaws and charter are contracts among its shareholders").
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.