remark, only 16 companies had adopted
exclusive-forum bylaws. By the end of
2011, about 200 Delaware corporations
had enacted them.
The second and particularly contentious reason corporate lawyers like the
idea of exclusive-forum bylaws: Corporate
boards of directors can adopt them without shareholder approval.
In February, a group of plaintiffs firms
sued nine corporations—Autonation
Inc., Chevron Corp., Curtis Wright Corp.,
Danaher Corp., Franklin Resources Inc.,
Navistar International Corp., Priceline.
com Inc., SPX Corp. and Superior Energy
Services Inc.—on behalf of shareholders
who claim the companies’ exclusive-forum provisions are unfair. The plaintiffs
take issue with the fact that they are
bound to the bylaws without their consent. They also say the provisions shield
the companies’ directors.
However, defense lawyers say the
plaintiffs’ concerns are invalid.
“The tables are not totally stacked
against shareholders in Delaware,” says
Waller Lansden Dortch & Davis Partner
Larry Childs. “If a shareholder is able to sue
any where in the country, and the courts in
the other states don’t apply the Delaware
law the way the Delaware courts would, it
creates uncertainty and extra costs.”
Haas says shareholders also bene-
fit from exclusive-forum bylaws because
they discourage forum shopping. “The
plaintiffs lawyers bring a lawsuit in a par-
ticular jurisdiction not necessarily because
it’s the friendliest to shareholders, but
because it’s the best jurisdiction in terms
of awarding them a large fee award,” he
says. “As a shareholder, I would be in favor
of [an exclusive-forum provision] because
it reduces litigation costs and opportunis-
tic forum shopping.”
in February have repealed their chal-
lenged bylaws, making the plaintiffs’
claims moot. Chevron, on the other hand,
responded to the shareholders’ complaint
and revised its bylaws to specify that
certain litigation can occur outside of
Delaware if the Court of Chancery were
to lack subject-matter jurisdiction.
Wait and See
Most experts predict that the Chancery
Court will uphold the challenged companies’ bylaws. At most, they say, the court
may make some technical revisions to the
“There may be some narrowing—the
court could say that there has to be some
shareholder consent,” says Prof. Logan
Robinson of the University of Detroit
Mercy School of Law.
If for some reason the Chancery
Court were to invalidate the bylaws, Haas
says the question then becomes whether
companies will still be able to adopt
exclusive-forum provisions in their certificates of incorporation with shareholder
approval. According to Drinker Biddle
Partner Troy Calkins and lawyer Adam
Weinstock, there haven’t yet been any
lawsuits challenging provisions included
in companies’ certificates of incorporation.
There also haven’t yet been any lawsuits
challenging the legality of exclusive-forum
provisions that shareholders approved to
be included in companies’ bylaws.
Haas says companies that don’t currently have exclusive-forum bylaws should
take a wait-and-see approach before
adopting them. “We need to see how this
plays out in the Delaware courts, and we
also need to see how shareholders’ views
adjust and evolve on this issue,” he says.
On the other hand, private companies looking to go public should follow
Facebook Inc.’s lead. The social network
adopted exclusive-forum provisions
before its initial public offering, which
means no shareholder approval was
required. “That’s the smart way to go,”
Robinson says. “I think that will become
a routine provision for companies preparing for an IPO now.” n
Many of the companies that were sued
IN JANUARY 2011, THE NORTHERN DISTRICT OF CALIFORNIA REFUSED TO
enforce Oracle Corp.’s exclusive-forum bylaws.
In Galaviz v. Berg, Oracle shareholders sued a handful of the company’s directors, claiming they overbilled the government millions of dollars for software it
purchased between 1998 and 2006. Oracle sought a motion to dismiss the case,
pointing out that its board adopted bylaws in 2006 that require all shareholder
litigation to take place in Delaware, where the company is incorporated.
But the court disagreed. Not only did shareholders not consent to the provision, but the court also noted that all of the defendants in the lawsuit had
approved the provision after their alleged wrongdoing, which made the bylaws
appear as a shield of liability.
Since Galaviz, many Delaware corporations have elected to wait for shareholder approval before adopting any exclusive-forum provisions.