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.
Posts Tagged ‘Forum selection’
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.
In many jurisdictions, a statute of limitations may not be extended by contract.  Delaware follows this rule, so its three-year statute of limitations for contract claims generally may not be extended.  Moreover, under Delaware’s borrowing statute, contract claims arising outside of Delaware but litigated in a Delaware court are subject to the shorter of that three-year period or the time established by the jurisdiction where the cause of action arose.  Notwithstanding these default rules, the statutory limitations period can be reduced by contract.  While many private company acquisition agreements do in fact shorten the statute of limitations for many breaches of certain representations and warranties by providing that such representations and warranties “survive” for a shorter period, it is also often the case that buyers want certain representations and indemnification obligations to “survive” longer, and in some cases, beyond the statutory period.  In order to achieve such a result, parties may, under Delaware law, use a so-called “specialty” contract, i.e., a contract that is entered into under seal, which will be subject to a twenty-year limitations period. 
During 2013, in addition to the important changes to the Delaware General Corporation Law (“DGCL”) and the Limited Liability Company Act, described here, the Delaware courts issued a number of decisions that have a direct impact on the M&A practice. Below are our Top 5 case law picks for M&A practitioners:
1. A new look at the standard of review in going-private mergers (the Business Judgment Rule)
In its In re MFW Shareholders Litigation (May 29, 2013) decision, the Court of Chancery held that in going-private mergers with a controlling stockholder on both sides the deferential business judgment standard of review applies, instead of the entire fairness standard, if certain procedural safeguards are included from the beginning. Specifically, the controlling stockholder has to agree at the outset to proceed with the merger only if the transaction is both (1) negotiated and approved by an attentive special committee comprised of directors who are independent of the controlling stockholder and fully empowered to decline the transaction and to retain its own financial and legal advisors and (2) conditioned on the un-coerced, fully informed and non-waivable approval of a majority of the unaffiliated minority stockholders.
Over the past year, boards of directors continued to face increasing scrutiny from shareholders and regulators, and the consequences of failures became more serious in terms of regulatory enforcement, shareholder litigation and market reaction. We expect these trends to continue in 2014, and proactive board oversight and involvement will remain crucial in this challenging environment.
During 2013, activist investors publicly pressured all types of companies—large and small, high-flyers and laggards—to pursue strategies focused on short-term returns, even if inconsistent with directors’ preferred, sustainable long-term strategies. In addition, activists increasingly focused on governance issues, resulting in heightened shareholder scrutiny and attempts at participation in areas that historically have been management and board prerogatives. We expect increased activism in the coming year. We also expect boards to continue to have to grapple with oversight of complex issues related to executive compensation, shareholder litigation over significant transactions, risk management, tax strategies, proposed changes to audit rules, messaging to shareholders and the market, and board decision-making processes. And, as evidenced in recent headlines, in 2014 the issue of cybersecurity will demand the attention of many boards.