Trends In Exclusive Forum Bylaws

In response to the rising tide of strike suits challenging mergers and acquisitions and the adequacy of executive compensation disclosures, more companies are adopting or considering adopting exclusive forum bylaws. These bylaws, which are largely a Delaware phenomenon, require that derivative actions, stockholder class actions, and other intra-corporate disputes be litigated exclusively in designated courts. This article examines the increase in the adoption of such bylaws following a June 2013 Delaware Court of Chancery decision upholding their validity. It also examines the language companies are including in such bylaws, their enforceability in litigation, and issues for boards to consider before adopting them.

For Delaware corporations facing a rising tide of strike suits (litigation brought for the primary purpose of obtaining a settlement), the June 25, 2013, decision by the Delaware Court of Chancery in Boilermakers Local 154 Retirement Fund v. Chevron Corporation,1 which upheld the validity of "exclusive forum" bylaws adopted by Chevron Corporation and FedEx Corporation, marked an important milestone.2 Exclusive forum bylaws require derivative actions, stockholder class actions, and other intra-corporate disputes to be litigated exclusively in a specified forum. Prior to Boilermakers, that forum was 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

Multiforum litigation is most well-known in the context of mergers and acquisitions. For example, in 2012, 93 percent 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 percent resulted in multiforum litigation in Delaware and other jurisdictions, 19 percent were challenged outside of Delaware only, and 16 percent 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, or, in some cases, changes in deal protections, but no increase in purchase consideration for stockholders.7 The entrepreneurial plaintiffs' bar has also been pursuing lawsuits modeled on merger litigation that allege fiduciary breaches by boards of directors in connection with executive compensation matters. The current generation of such lawsuits often seeks to enjoin annual meetings where stockholders are being asked to approve equity compensation plans. Such litigation tends to be brought outside of a company's state of incorporation.

History of Exclusive Forum Bylaws

Public companies began adopting exclusive forum bylaws in 2010 through unilateral board action, while companies not yet publicly traded (e.g., those going public, being spun off, or emerging from bankruptcy) overwhelmingly included such 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, and they 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 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 both statutorily and contractually valid.10

The plaintiffs appealed the decision to the Delaware Supreme Court. It appeared likely that the Boilermakers opinion would be upheld. However, on October 15, 2013, the plaintiffs unexpectedly withdrew the appeal, having 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, the opinion only addressed the facial validity of the bylaws.11 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, 2013.12 The case against Chevron, which is in a different position as a result of a parallel case in the United States District Court for the Northern District of California, remains pending.13 According to the Delaware plaintiffs' October 28 motion, Chevron wanted to "certify a class and litigate all of the remaining claims."14 Chevron may also be considering whether there are other mechanisms to obtain a binding precedent. However, the Chevron case may simply end with a dismissal with prejudice, like the FedEx case.

Company Responses to Boilermakers

Rate 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 rate of bylaw adoptions from June 25 to October 31, 2013, many companies were comfortable acting (Table 1).

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 page 9) adopted or announced plans to adopt exclusive forum bylaws from June 25, 2013, through October 31, 2013, and the pace of adoptions has not slowed since then.15 To put these numbers in perspective, only one company adopted an exclusive forum bylaw during the comparable period in 2012.16

Corporations in other states also appear to be responding to Boilermakers, although to a lesser degree. During the same period in 2013, 18 Maryland corporations or real estate investment trusts adopted (or announced plans to adopt) exclusive forum bylaws, along with four corporations in Pennsylvania, two each in Nevada and Oregon, and one each in Florida, South Carolina, Texas, and Virginia.17 Three of these 30 corporations are S&P 500 constituents.18 (For a list of these companies, see page 9.)

Circumstances of adoption Largely consistent with past patterns, 85 percent of the exclusive forum bylaws analyzed were adopted or proposed by corporations that were already public. In addition, 11 percent of the bylaws analyzed were (or were being) adopted in connection with IPOs, 2 percent were being adopted in connection with reincorporation in Delaware, 1 percent were (or were being) adopted in connection with a spin-off, and 1 percent were adopted during emergence from bankruptcy. The percentage of bylaws adopted in connection with IPOs reflects an increase from 6.6 percent as of January 1, 2012.19

It is unclear whether more IPO companies are opting for an exclusive forum bylaw rather than a charter provision to appear more stockholder-friendly (since stockholders generally have the power to repeal or amend bylaws), to provide the board with the unilateral ability to effect future amendments, or for other reasons. Of the 12 IPO companies analyzed, four included (or planned to include) exclusive forum provisions in both their charters and bylaws, thereby lessening the significance of their exclusive forum bylaws for purposes of this analysis. Additionally, one company that adopted an exclusive forum bylaw announced that it will present the bylaw for approval at its next annual stockholders meeting. The ratification approach is reminiscent of the approach many companies take when adopting poison pills in response to the policies of Institutional Shareholder Services, Inc. (ISS), the influential proxy advisor. ISS will generally recommend voting against or withholding votes from the entire board if the board adopts a poison pill with a term of more than 12 months, or renews any existing pill, without stockholder approval.20

Consenting to an alternate forum In Boilermakers, the court noted that the boards of directors of Chevron and FedEx may consent to being sued in another jurisdiction under their exclusive forum bylaws. Bylaws that permit such optionality are viewed as "elective" and generally begin with the language...