The always creative Joe Grundfest, a Stanford Law School professor and former SEC commissioner, proposes that public companies adopt charter provisions to select in advance the forum where shareholder litigation would occur… Delaware, in most cases. He argues:
Forum selection clauses are common in commercial agreements. They are also broadly respected and readily enforced, even when characterized as contracts of adhesion. In contrast, forum selection clauses in charters and bylaws governing intra-corporate disputes are exceedingly rare. This presentation, which accompanied the 2010 Pileggi Lecture at the University of Delaware, documents the incidence and evolution of forum selection clauses in publicly traded entities. It analyzes the specific language used in these provisions, observes that these provisions tend to arise in distinct clusters, and suggests that the incidence of these provisions has increased dramatically (though off a small base) since the recent Revlon decision in Chancery. It also explores the causes of the divergence in incidence, and considers whether forum selection clauses are likely to be enforced by the courts. The analysis concludes that forum selection clauses should be enforceable whether included in a charter or bylaw, and should bind all shareholders, without regard to whether they were adopted pursuant to a shareholder vote or whether the shareholder acquired stock before or after adoption of the provision.
Privately held firms might best adopt elective forum selection provisions prior to an IPO, and publicly traded firms can adopt forum selection provisions in their charters or bylaws. Obtaining majority shareholder support for a charter amendment may be easier than some observers expect. If a corporation determines that it prefers not to amend its charter, board action is sufficient to amend the bylaws, as recently demonstrated by Chevron. The benefits of adopting a forum selection provision will likely exceed the costs for most entities. If this calculus is correct, there should be a large increase in the incidence of intra-corporate charter or bylaw forum selection provisions in coming years.
Read further discussion of the concept by Steven M. Davidoff (A Litigation Plan That Would Favor Delaware, NYTimes, 10/26/2010) who clarifies the provision would only be effective for state law claims, such as those involving breaches of fiduciary duty, not federal claims such as securities fraud charges. Watch for the number of companies with such provisions to quickly spike well beyond the current 23 companies. This move is likely to cut down the incidence of litigation; will shareowners still be protected? For additional background, see Are Delaware Courts “Losing” Cases on Delaware Corporate Law Filed Elsewhere, Delaware Corporate and Commercial Litigation Blog, 4/27/2010.
Comments are closed.