In its landmark 1971 Chris-Craft decision, the Delaware Supreme Court observed that “inequitable action does not become permissible simply because it is legally possible.” This quote aptly captures the two-stage inquiry that Delaware courts will apply when reviewing a challenged board action—first determining the legality of the action, and second appraising the equity, or fairness, of the act and its application under the specific circumstances.
Posts Tagged ‘Forum selection’
In a recent decision, the U.S. District Court for the Southern District of Ohio invoked federal procedural law to enforce a board-adopted forum selection bylaw. North v. McNamara, No. 1:13-cv-833 (S.D. Ohio Sept. 19, 2014). In so ruling, the court recognized that such bylaws can promote “cost and efficiency benefits that inure to the corporation and its shareholders by streamlining litigation into a single forum.”
The litigation involves Chemed, a Delaware corporation headquartered in Cincinnati, Ohio. In August 2013, the corporation’s board adopted a bylaw selecting any state or federal court in Delaware as the exclusive forum for intracorporate litigation. Several months later, a stockholder filed a derivative suit in federal court in Delaware on behalf of the corporation challenging certain conduct dating back to 2010. Shortly thereafter, a different stockholder filed substantially similar litigation, also on behalf of the corporation, against the same defendants concerning the same conduct in Ohio federal court. Invoking the bylaw, defendants moved to transfer the case to the Delaware federal district court under the federal venue statute, essentially seeking to consolidate it with the earlier-filed Delaware federal action.
On September 8, 2014, Chancellor Andre G. Bouchard issued a notable decision in City of Providence v. First Citizens BancShares, Inc., upholding—as a matter of facial validity and on an “as-applied” basis at the motion to dismiss stage—a forum selection bylaw adopted by a Delaware corporation selecting another jurisdiction (North Carolina, where the company is headquartered) as the forum for intra-corporate disputes. This decision is important not only because it reaffirms the decision last year by then-Chancellor, now Chief Justice, Leo E. Strine, Jr. in Boilermakers Local 154 Retirement Fund v. Chevron Corporation, 73 A.3d 934 (Del. Ch. 2013), upholding the facial validity of forum selection bylaws, but also because it includes notable pronouncements from the current Chancellor on the application of such provisions. 
Just over a year ago, the Delaware Court of Chancery upheld the facial validity of exclusive forum bylaws adopted by corporate boards as a means of rationalizing stockholder litigation. In the time since Chancery’s landmark Chevron opinion, numerous corporations have adopted exclusive forum bylaws, and courts in New York, Texas, Illinois, Louisiana, and California have enforced such bylaws against stockholders bringing duplicative lawsuits in violation of their terms. The result, as one commentator recently noted, has been to disincentivize duplicative filings and reduce the concomitant litigation “deal tax” on merging parties. Yet, despite this progress, pernicious multijurisdictional litigation persists. A recent decision from a court in Oregon (Roberts v. TriQuint SemiConductor, Inc., No. 1402-02441 (Or. Cir. Ct. Aug. 14, 2014)) illustrates the potential harm from such litigation and the importance of continued authoritative articulation of the law to ensure the efficacy of exclusive forum bylaws.
It almost goes without saying that the first half of 2014 brought with it the most significant development in securities litigation in decades: the U.S. Supreme Court decided Halliburton Co. v. Erica P. John Fund, Inc.—Halliburton II. In Halliburton II, the Court declined to revisit its earlier decision in Basic v. Levinson, Inc.; plaintiffs may therefore continue to avail themselves of the legal presumption of reliance, a presumption necessary for many class action plaintiffs to achieve class certification. But the Court also reiterated what it said 20 years ago in Basic: the presumption of reliance is rebuttable. And the Court clarified that defendants may now rebut the presumption at the class certification stage with evidence that the alleged misrepresentation did not affect the security’s price, making “price impact” evidence essential to class certification.
Public companies increasingly are adopting “exclusive forum” bylaws and charter provisions that require their stockholders to go to specified courts if they want to make fiduciary duty or other intra-corporate claims against the company and its directors.
Exclusive forum provisions can help companies respond to such litigation more efficiently. Following most public M&A announcements, for example, stockholders file nearly identical claims in multiple jurisdictions, raising the costs required to respond. Buyers also feel the pain, since they typically bear the costs and may even be named in some of the proceedings. Exclusive forum provisions help address the increased costs, while allowing stockholders to bring claims in the specified forum.
Following the Delaware Court of Chancery’s decision in July 2013 upholding the validity of exclusive forum bylaws, a number of corporations, including over two dozen S&P 500 companies, amended their bylaws to include these provisions, and the provisions were commonly included in the charters or bylaws of companies in initial public offerings. Many public companies, however, determined to take a wait-and-see approach, in order to assess whether non-Delaware courts would enforce the bylaw and whether companies that adopted the bylaw received negative investor feedback in the 2014 proxy season or otherwise.
Corporations today are routinely subject to expensive shareholder litigation for which shareholders ultimately foot the bill. Even weak shareholder claims pose significant costs and uncertainty, and exert significant settlement pressures, on corporations. Several recent state court decisions, however, underscore the potential for corporate bylaws, including those adopted by boards, to reduce incentives for the plaintiffs’ bar to file such lawsuits:
- The Delaware Court of Chancery has upheld, at least as a general matter, the statutory and contractual validity of board-adopted bylaws that seek to limit the forum for intra-corporate litigation.
- State courts in Louisiana, New York and Illinois have, in turn, enforced Delaware exclusive forum clauses.
- The Delaware Supreme Court has upheld the statutory and contractual validity of bylaws that allocate the cost of intra-corporate litigation to a losing plaintiff.
- A state court in Maryland has upheld a corporate bylaw that requires the arbitration of intra-corporate disputes.
It is now clear that, for Delaware companies, a charter or by-law forum selection clause (FSC) is a valid and promising response to the problems posed by multi-jurisdictional disputes involving claims based upon internal corporate affairs (such as M&A litigation and derivative actions). Three recent rulings by “foreign” courts—courts located outside of the forum selected in the charter or by-law (which is usually Delaware). In each case, the “foreign” court granted motions to dismiss based upon an FSC that selected Delaware as the exclusive forum. Still, as we have previously advocated,  the better course would be to include with an FSC a consent to jurisdiction and service provision for stockholders who commence the foreign litigation that would permit the defendants in the foreign case to enforce the forum selection clause in Delaware. 
As dealmakers put the finishing touches on public M&A transactions, the question is no longer if there will be a lawsuit, but rather when, how many and in what jurisdiction(s). And while many of the cases remain of the nuisance strike-suit variety, recently it seems every few weeks there is an important Delaware decision or other litigation development that potentially changes the face of deal litigation and introduces new risks for boards and their advisers. Now more than ever, dealmakers need to be aware of, and plan to mitigate, the resulting risks from the earliest stages of any transaction.