Insights

Forum selection bylaws upheld

August 8, 2013

Management Liability/D&O

Corporate multi-jurisdictional litigation – the same matter being litigated against a corporate defendant in a variety of jurisdictions – seems absurdly inefficient on its face. Corporate giants Chevron and FedEx agreed, and the board of each of these companies inserted a forum selection provision in their bylaws. In doing so, the board restricted shareholders to Delaware state court—and Delaware state court only—if they want to bring suit in certain categories (both companies are Delaware corporations). The four categories are:

• derivative suits,

• fiduciary duty suits,

• claims under the Delaware General Corporation Law, and

• other claims regarding internal affairs of the corporation.

Certain shareholders of Chevron and FedEx reacted to this change in the bylaws by promptly suing the boards on a variety of grounds, the gravamen of all of which was the unauthorized diminution of shareholder rights.

In a decision that is currently being appealed to the Delaware Supreme Court, Boilermakers Local 154 v. Chevron, Delaware Chancery Court’s Chancellor Leo Strine held that the unilateral action taken by Chevron and FedEx was proper. Chancellor Strine’s decision is extremely well-reasoned, and unlikely to be reversed.

According to The Wall Street Journal, about 300 corporations have implemented Delaware-only litigation provisions (along the lines of the provisions at issue in the Chevron case) in recent years. While part of this may stem from a desire to protect directors and officers, it is also an effort to prevent suits from being filed in multiple courts each time a corporation makes a significant decision.

Is multi-jurisdictional litigation really a problem?
It seems axiomatic that the answer to this question is “yes.” Suits filed in a range of courts can result in inconsistent decisions, slower moving trials and higher overall costs. For example, if shareholders are unhappy with the terms of the sale of a company, it seems that the answers to be gained by litigation should be the same regardless of jurisdiction, and there’s no point in answering the same questions in multiple jurisdictions. Nevertheless, when a public company decides to sell itself, it will face on average more than five suits about this same transaction. The idea that shareholders need to be able to sue at the local courthouse seems a little silly in this age of sophisticated corporate litigation—we aren’t talking about an individual consumer’s rights or similar cases where immediate access to a local court feels more important from a justice perspective. Indeed, the plaintiffs bringing the types of suits that Chevron and FedEx have restricted to Delaware are all sophisticated and used to bringing suit in Delaware regardless of their state of citizenship.

There is a school of thought that points out the following: in most cases, many of the duplicative suits brought in multiple jurisdictions are stayed pending the resolution of the matter in one court. Of course this requires time, lawyers, and is not a guaranteed outcome. Still, it should be mentioned that corporate defense attorneys in today’s environment are seasoned when it comes to managing multi-forum litigation well.

Is it important to be sued in Delaware (versus another jurisdiction)?
It is well-established that the Delaware Chancery court is professional, efficient and extremely experienced and sophisticated when it comes to matters of corporate law. It is this court that handles cases related to M&A, breach of duty and corporate governance. This court also has the reputation of being business-friendly.

It should also be noted, however, that there are many other courts in the United States that are skilled in handling matters of corporate law issues, including when it comes to interpreting Delaware corporate law. For example, there are some exceptional jurists in California who have excellent reputations when it comes to handling Delaware corporate law matters. In other words: Delaware is good, and there are other good jurisdictions for businesses as well.

In my next blog post, I’ll discuss some considerations for boards that are interested in implementing forum selection clauses for their own companies.


The views expressed in this blog are solely those of the author. This blog should not be taken as insurance or legal advice for your particular situation. Questions? Comments? Concerns? Email: phuskins@woodruffsawyer.com.

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All views expressed in this article are the author’s own and do not necessarily represent the position of Woodruff-Sawyer & Co.

Priya Cherian Huskins

Senior Vice President, Management Liability

Editor, Management Liability/D&O

Priya is a recognized expert and frequent speaker on D&O liability risk and its mitigation. In addition to consulting on D&O insurance, she counsels clients on corporate governance matters, including ways to reduce their exposure to shareholder lawsuits and regulatory investigations. Priya serves on the board of an S&P 500 public company and a large private company and has an impressive list of publications, speaking engagements, and awards for her influence and expertise in the industry. 

415.402.6527

LinkedIn

Priya Cherian Huskins

Senior Vice President, Management Liability

Editor, Management Liability/D&O

Priya is a recognized expert and frequent speaker on D&O liability risk and its mitigation. In addition to consulting on D&O insurance, she counsels clients on corporate governance matters, including ways to reduce their exposure to shareholder lawsuits and regulatory investigations. Priya serves on the board of an S&P 500 public company and a large private company and has an impressive list of publications, speaking engagements, and awards for her influence and expertise in the industry. 

415.402.6527

LinkedIn