A recent wave of lawsuits is challenging what had been a growing trend of Delaware corporations to include exclusive forum provisions in their bylaws. These provisions generally require that, unless the corporation agrees otherwise, the Delaware Court of Chancery be the sole and exclusive forum for the following types of claims brought by, against or on behalf of the corporation: (1) derivative actions, (2) claims asserting a breach of fiduciary duty, (3) claims arising pursuant to the Delaware General Corporation Law and/or (4) claims governed by the internal affairs doctrine.
At the start of 2010, only a handful of Delaware corporations included exclusive forum provisions in their certificate of incorporation or bylaws. By the end of 2011, however, nearly 200 Delaware corporations had enacted this type of provision. This explosion in the adoption of exclusive forum provisions appears to have been prompted by the Court of Chancery's March 2010 opinion in In re Revlon Shareholders Litigation, which stated, in dicta, that "if boards of directors and stockholders believe that a particular forum would provide an efficient and value-promoting locus for dispute resolution, then corporations are free to respond with charter provisions selecting an exclusive forum for intra-entity disputes."
Notwithstanding the statements in Revlon, in February 2012, a series of lawsuits were filed in the Court of Chancery challenging the inclusion of exclusive forum provisions in corporate bylaws by boards of directors. (To date, there do not appear to be any filed complaints challenging the validity of exclusive forum provisions in certificates of incorporation or of these provisions being included in bylaws with stockholder approval.) While the provisions being challenged vary from one corporation to the next, the plaintiffs in the cases share common legal representation and have raised the same set of arguments in each case.
The claims in each complaint fall into the following general categories: (1) the bylaw provisions conflict with various provisions of Delaware and federal law, (2) stockholders are bound by the bylaw provisions without their consent, (3) the directors breached their fiduciary duties to the stockholders by adopting the provisions, and (4) the provisions are not "reasonable and equitable." These allegations are detailed below.
(1) Exclusive forum bylaw provisions are illegal. The various lawsuits list a bevy of ways in which the challenged provisions purportedly conflict with state and federal law. Among these are allegations that the provisions (a) exceed the scope of authority allowed to bylaw provisions by 8 Delaware Code §109(b) by binding individuals not intended to be governed by corporate bylaws, (b) exceed statutory limits on the Court of Chancery's jurisdiction over certain matters, (c) impermissibly grant personal jurisdiction in Delaware over all stockholders of Delaware corporations, (d) require that claims be brought in Delaware even if the Court of Chancery has no personal jurisdiction over some or all potential defendants, and (e) impinge on federal jurisdiction under several federal securities laws.
(2) Stockholders have not consented to being bound by the provision. Most of the challenged bylaws contain a statement that all persons acquiring stock are deemed to have consented to the provisions. The plaintiffs allege that the exclusive forum bylaw provisions were unilaterally adopted by the corporation without the consent of all existing stockholders in an effort to distinguish the provision from similar contractual provisions that have been consented to by the bound parties and are regularly enforced.
(3) The directors of the defendant corporations have breached their fiduciary duties to stockholders. The plaintiffs allege that the directors have a material interest in the bylaw provision because they enable the directors to confine litigation to a forum the directors perceive to be more favorable to themselves to the detriment of stockholders.
(4) Exclusive forum bylaw provisions are not reasonable and equitable. The plaintiffs allege that the challenged provisions are unreasonable on their face, in part because they require stockholders to consent to a forum while preserving the right of the corporation itself to consent to other forums.
It is unclear whether the Court of Chancery will accept one or more of these arguments or whether it will allow the exclusive forum provisions to stand. It is also possible that the court will find exclusive forum provisions to be generally valid but will provide guidance on the permissible scope of the provisions or on the process by which they are adopted.
Even if the Court of Chancery ultimately approves of board-adopted exclusive forum provisions, it remains to be seen whether corporations in other states will adopt similar provisions or whether courts in other jurisdictions will abide by exclusive forum provisions in the bylaws of Delaware corporations.
In Galaviz v. Berg, the U.S. District Court for the Northern District of California refused to enforce an exclusive forum provision contained in the bylaws of Oracle Corporation, a Delaware corporation, denying the defendant's motion to dismiss for improper venue. The court's refusal to enforce the bylaw to dismiss the case was based in part on the argument that existing stockholders had not consented to the provision (although the court also stressed that the bylaw was adopted by the very directors who were defendants in the suit, after the alleged wrongdoing had taken place — a fact that may have led the court to view the adoption of the bylaw as an attempt by defendants to disturb the plaintiff's choice of forum in that case, rather than a decision by the board regarding the best interests of the corporation). Other Delaware corporations have responded to the Oracle decision by proactively seeking stockholder approval of their own exclusive forum provisions.
If courts in Delaware and other jurisdictions uphold the use of exclusive forum bylaw provisions, a greater percentage of cases pertaining to corporate affairs will likely be filed in Delaware, which could create greater certainty in the outcome of litigation. But until some, or all, of the cases challenging the use of exclusive forum provisions are resolved, companies may be reluctant to add an exclusive forum provision to their bylaws without stockholder approval.
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