Exclusive Forum Bylaws Bring Lawsuits

Reuters reports that “Chevron Corp. and eight other corporations were sued by shareholders on Tuesday for adopting a bylaw that requires common types of shareholder lawsuits be brought exclusively in Delaware’s Chancery Court.”

So-called “exclusive forum” bylaws are being adopted by an increasing number of corporations as a way to control a surge in shareholder litigation.

The interest in the bylaw comes as shareholders are increasingly bringing simultaneous lawsuits making nearly identical claims in two or more courts, often challenging merger deals.

Plaintiff’s represented by Kessler Topaz Meltzer & Check LLP and Prickett, Jones & Elliott PA claim the lawsuits adopted the bylaws as a means of reducing the risk that directors would be found liable.

In addition to Chevron, the companies are Priceline.com Inc (PCLN.O), Franklin Resources Inc (BEN.N), SPX Corp (SPW.N), Autonation Inc (AN.N), Superior Energy Services Inc (SPN.N), Danaher Corp (DHR.N), Navistar International Corp (NAV.N) and Curtis Wright Corp (CW.N).

The Council of Institutional Investors recently approved a new policy discouraging companies from adopting charter or bylaw amendments that restrict the venue for shareowner litigation to a given forum. (1.9 Judicial Forum: U.S. companies should not attempt to restrict the venue for shareowner claims by adopting charter or bylaw provisions that seek to establish an exclusive forum.)

The policy is a response in part to a March 2010 Delaware Court of Chancery opinion that gave a green light to any Delaware corporation to establish the Delaware Court of Chancery as the exclusive forum for “intra-entity” disputes (claims asserting director and officer breaches of fiduciary duty, claims seeking to overturn directors’ business judgments on mergers, and other matters).

As of July 2011, 80 Delaware corporations had adopted an exclusive forum provision. Most did so without seeking shareowner approval. However, since the U.S. District Court for Northern California declared Oracle’s exclusive forum provision unenforceable in part because it was never submitted for shareowner approval, companies have become more amenable to the idea of ratification by owners.

As I noted yesterday, when I heard Judge Laster of Delaware recommend such bylaws I couldn’t help but think of the ultimate multi-forum nightmare — small claims court shareowner flash mobs.

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