Trends In Exclusive Forum Bylaws: They're Valid, Now What?

For Delaware corporations facing a rising tide of strike suits, the Delaware Court of Chancery's June 25, 2013 Boilermakers1 decision upholding the validity of "exclusive forum" bylaws adopted by Chevron Corporation and FedEx Corporation2 marked an important milestone. Exclusive forum bylaws require that derivative actions, stockholder class actions and other intra-corporate disputes be litigated exclusively in a specified forum—prior to the decision, almost always the Delaware Court of Chancery. Such provisions are intended to address plaintiff forum shopping and the related phenomenon of plaintiffs' attorneys filing lawsuits arising out of the same facts in multiple jurisdictions to obtain attorneys' fees. In particular, these provisions seek to avoid the cost and uncertainty of parallel litigation, the risk of inconsistent outcomes and the potential for Delaware law, which governs these disputes, to be misinterpreted by other courts. Additionally, they are intended to allow Delaware corporations to have intra-corporate disputes resolved by the courts most familiar with the state's corporate law.3 As suggested in Boilermakers, there is a benefit in having cases "decided in the courts whose Supreme Court has the authoritative final say as to what the governing law means. . . ."4

Multi-forum litigation is most well known in the context of mergers and acquisitions. For example, in 2012, 93% of merger and acquisition transactions valued at more than $100 million resulted in litigation, with an average of 4.8 lawsuits per transaction.5 For transactions with Delaware-incorporated targets, 65% resulted in multi-forum litigation in Delaware and other jurisdictions, 19% were challenged outside Delaware only and 16% were challenged solely in the Delaware Court of Chancery.6 The most common outcome of such lawsuits was a settlement that provided for the payment of attorneys' fees and additional disclosure,7 or in some cases, changes in deal protections, but no increase in purchase consideration for stockholders. The entrepreneurial plaintiffs' bar has also been pursuing lawsuits, modeled on merger litigation, alleging fiduciary breaches by boards of directors in connection with executive compensation matters. The current generation of such lawsuits typically seeks to enjoin annual meetings where stockholders are being asked to cast annual non-binding votes on executive compensation ("say on pay") or approve equity compensation plans. Such litigation tends to be brought outside a company's state of incorporation.

This article will provide a brief overview of the history of exclusive forum bylaws, followed by an in-depth analysis of: (a) the extent to which Boilermakers has prompted corporations to adopt exclusive forum bylaws; (b) the specific language being included in such bylaws; (c) litigation testing the enforceability of exclusive forum bylaws and (d) issues to consider before adopting such a provision.

1. HISTORY OF EXCLUSIVE FORUM BYLAWS

   As discussed in Exclusive Forum Provisions: Putting on the Brakes, public companies began to adopt exclusive forum bylaws in 2010 through unilateral board action, while companies going public, being spun off, emerging from bankruptcy or otherwise in situations where they were not yet publicly traded, overwhelmingly included provisions in their charters.8 Unlike bylaws, charter amendments must be approved by both the board and stockholders. Thus, as a practical matter, bylaws are easier to adopt than charter amendments, and may be easily amended by the board to take into account case law developments and refinements. However, stockholders retain the right to amend or repeal bylaws, including exclusive forum bylaws, and bylaws are generally easier to attack than stockholder-approved charter amendments.

   Since 2010, charter adoptions have continued unabated, and have become an accepted norm in initial public offerings (IPOs). However, bylaw adoptions ground to a halt in early 2012 after plaintiffs' firms filed 12 virtually identical lawsuits in the Delaware Court of Chancery challenging the validity of exclusive forum provisions adopted by large, public corporations.9 Among other things, the complaints asserted that, under Delaware law, the boards of these companies lacked the power to adopt such bylaws without stockholder approval. While 10 of the 12 companies repealed their bylaws, and nine of those companies paid attorneys' fees as a result, Chevron and FedEx opted to litigate. In Boilermakers, Chancellor Strine unambiguously found that their exclusive forum bylaws were valid both statutorily and contractually.

   Consistent with prior statements, the plaintiffs appealed the decision to the Delaware Supreme Court. It appeared likely that the well-reasoned Boilermakers opinion would be upheld. However, on October 15, 2013, the plaintiffs unexpectedly withdrew the appeal. They seemingly concluded that the Delaware Supreme Court would affirm, creating a binding precedent from a higher level court. Compared to the opinion from the Court of Chancery, such a precedent would make it more difficult to successfully mount an "as applied" challenge to the enforcement of a forum selection bylaw in a non-Delaware court. While the plaintiffs in Boilermakers asserted a number of other claims, including breaches of fiduciary duty,10 the opinion only addressed the facial validity of the bylaws. On October 28, 2013, the plaintiffs moved for an order voluntarily dismissing all remaining claims without prejudice, an option that was not attractive to either defendant. Ultimately, the lawsuit against FedEx was dismissed with prejudice on November 1, 2013,11 while the case against Chevron remains pending. Chevron is in a different position from FedEx since it is facing a parallel case in the United States District Court for the Northern District of California that had been stayed pending the outcome of a Delaware appeal.12 According to the Delaware plaintiffs' October 28 motion, Chevron wanted to "certify a class and litigate all of the remaining claims."13 Chevron may also be considering whether it is possible to obtain binding precedent.

2. ANALYZING COMPANY RESPONSES TO BOILERMAKERS

   1. Level of Bylaw Adoptions. The plaintiffs' appeal to the Delaware Supreme Court raised the question of whether corporations interested in adopting an exclusive forum bylaw would await a determination from the Delaware Supreme Court or view Boilermakers as a sufficient basis for stepping off the sidelines. Based on the author's research, many companies were comfortable acting. The chart below illustrates bylaw adoptions from June 25, 2013-October 31, 2013:

      Additionally, five companies planning to go public and two corporations seeking to reincorporate in Delaware announced plans to adopt exclusive forum bylaws during this period. In total, 112 Delaware corporations (listed on Appendix A) adopted or announced plans to adopt exclusive forum bylaws from June 25, 2013 through October 31, 2013.14 To put these numbers in perspective, during the comparable period in 2012, only one company adopted an exclusive forum bylaw.15

      While the statistics above relate to bylaws adopted by Delaware corporations, corporations in other states also appear to be responding to Boilermakers, although to a lesser degree. In Maryland,16 18 corporations or real estate investment trusts adopted (or announced plans to adopt) exclusive forum bylaws during the same period, followed by four corporations in Pennsylvania, two in each of Nevada and Oregon and one in each...