An Update on the Forum Selection Bylaw Cases

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday May 4, 2012 at 9:13 am
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Editor’s Note: The following post comes to us from Bradley W. Voss, partner in the Commercial Litigation Practice Group of Pepper Hamilton LLP, and is based on a Pepper Hamilton publication. This post is part of the Delaware law series, which is co-sponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

In February 2012, several purported class action lawsuits were filed in the Delaware Court of Chancery challenging corporate bylaw amendments adopted by companies pursuant to 8 Del. C. § 109. Generally speaking, the challenged bylaw amendments would require that certain types of corporate law claims by shareholders be brought and resolved in the Delaware Court of Chancery, and not elsewhere. [1] In the Delaware class actions, the shareholder plaintiffs sued a dozen companies, as well as members of their respective boards of directors. Each of the cases was assigned to Chancellor Leo E. Strine, Jr.

The complaints in the various actions are similar. Plaintiffs allege that the forum selection bylaw amendments are invalid under Delaware and other law, that they violate shareholder rights because they were adopted by boards of directors without the consent of the shareholders, and that the directors who adopted the bylaw amendments violated their fiduciary duties.

Of the 12 companies that were sued, the majority repealed the challenged bylaw prior to the deadline for responding to the complaint. In those cases, the parties stipulated that the claims were moot, and the actions were dismissed.

In contrast, Chevron answered the complaint, but only after revising its forum selection bylaw to allow for certain litigation to occur in another court or jurisdiction, if the Court of Chancery were to lack jurisdiction over the subject matter or over an indispensable party. The preface to Chevron’s 55-page answer may provide a glimpse into its litigation strategy: “The bylaw does not take any rights away from any shareholder. Instead, like all bylaws at all Delaware corporations, the forum selection bylaw merely regulates the way in which certain rights are exercised. … The board’s actions were well informed and taken with the shareholders’ best interests in mind. … Defendants intend to defend themselves and the forum-selection bylaw vigorously ….” Thus, it appears that Chevron will go forward with discovery, and possibly trial, over its adoption of the forum selection bylaw amendment.

Those interested in the Court of Chancery’s thoughts on the validity of forum selection provisions may not need to wait for the conclusion of the potentially lengthy process embarked upon by Chevron, however. The court’s views may emerge in the context of pre-trial motion practice, or in post-dismissal fee application proceedings in the cases that were dismissed as moot. If the plaintiffs’ lawyers seek a fee, the court likely will need to assess, among other things, whether plaintiffs’ claims were meritorious when filed and whether a benefit has been conferred on the corporation. In addition, on April 9, 2012, an action was filed in the Court of Chancery seeking to block a May 2012 shareholder vote on whether to amend a company’s certificate of incorporation (not its bylaws) to include a forum selection provision. The court may touch on the merits of that dispute in the context of the plaintiff’s request for interim relief, or otherwise.

Hopefully, developments in these cases will provide the court with an opportunity to speak on this important area of corporate governance. If so, a further update will follow.

Endnotes

[1] The impetus for the adoption of such forum selection bylaw amendments is likely found in the perception that lawyers for shareholder-plaintiffs sometimes sue in jurisdictions other than Delaware, even on matters governed by Delaware law, to take advantage of courts that are less familiar with Delaware corporate law. Some view the inclusion of a forum selection clause in a corporation’s constitutional documents as a way to ensure that Delaware law issues affecting a Delaware corporation will be resolved by Delaware judges, and thus reduce the potential for disruptive, costly, and duplicative multi-jurisdictional shareholder litigation. See generally In re Revlon, Inc. Shareholders Litigation, 990 A.2d 940, 960 (Del. Ch. 2010) (suggesting in dicta that an exclusive forum clause in a certificate of incorporation would be an appropriate response to shareholder suits in other jurisdictions). Many Delaware corporations have adopted forum selection bylaws in one form or another, but no Delaware court has directly addressed whether such provisions are valid.
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