Exclusive Forum Bylaws Bring Lawsuits

The Shareholder Activist - Exclusive Forum Bylaws Bring LawsuitReuters reports that “Chevron Corp. and eight other corporations were sued by shareholders for adopting a bylaw that requires common types of shareholder lawsuits be brought exclusively in Delaware’s Chancery Court.”

So-called “exclusive forum” bylaws are being adopted by an increasing number of corporations as a way to control a surge in shareholder litigation.

The interest in the bylaw comes as shareholders are increasingly bringing simultaneous lawsuits making nearly identical claims in two or more courts, often challenging merger deals.

Plaintiff’s represented by Kessler Topaz Meltzer & Check LLP and Prickett, Jones & Elliott PA claim the lawsuits adopted the bylaws as a means of reducing the risk that directors would be found liable.

In addition to Chevron, the companies are Priceline.com Inc (PCLN.O), Franklin Resources Inc (BEN.N), SPX Corp (SPW.N), Autonation Inc (AN.N), Superior Energy Services Inc (SPN.N), Danaher Corp (DHR.N), Navistar International Corp (NAV.N) and Curtis Wright Corp (CW.N).

The Council of Institutional Investors recently approved a new policy discouraging companies from adopting charter or bylaw amendments that restrict the venue for shareowner litigation to a given forum. (1.9 Judicial Forum: U.S. companies should not attempt to restrict the venue for shareowner claims by adopting charter or bylaw provisions that seek to establish an exclusive forum.)

The policy is a response in part to a March 2010 Delaware Court of Chancery opinion that gave a green light to any Delaware corporation to establish the Delaware Court of Chancery as the exclusive forum for “intra-entity” disputes (claims asserting director and officer breaches of fiduciary duty, claims seeking to overturn directors’ business judgments on mergers, and other matters).

As of July 2011, 80 Delaware corporations had adopted an exclusive forum provision. Most did so without seeking shareowner approval. However, since the U.S. District Court for Northern California declared Oracle’s exclusive forum provision unenforceable in part because it was never submitted for shareowner approval, companies have become more amenable to the idea of ratification by owners.

When I heard Judge Laster of Delaware recommend such bylaws I couldn’t help but think of the ultimate multi-forum nightmare — small claims court shareowner flash mobs.

To contact James McRitchie directly, please email jm@corpgov.net

Thank you for reading this investor activism blog. Please contact Info@TheShareholderActivist.com to request advice and recommendations on services and solutions to support corporate social responsibility and your shareholder activism. We also encourage you to submit your comments so that we can share your experiences with our growing community of shareholder activists.
Posted in Corporate Governance, Featured, Shareholder Policies & Investor Regulations | 1 Comment

One Response to Exclusive Forum Bylaws Bring Lawsuits

  1. The subtle differential meanings between control and management can be enlightening and simultaneously disturbing. As a function of corporate behavior, there has been a huge surge of shareholder litigation in recent years. Frankly, based on the meltdown which began in 2008, how could there not have been? While human beings are driven to achieve homeostasis,”we all have our limits.” The financial system was out of control, and on the brink. It was a “house of cards,” and elite corporations had the luxury of being “too big to fail.”

    Corporations are pushing exclusive forum bylaws in order to control multiple claims in multiple venues. This does not appear to be inherently wrong as long as shareholders are consulted and approve before hand. Plaintiff’s attorneys assert that exclusive forum “tactics” may reduce the liability risk of corporate directions. This is an empirical question that can only be assessed over time. And in today’s internet world “you can run, but you can’t hide.”

    Fiduciary duty is one of the highest codes in the land. Directors are always liable: it comes with the job. Proper stewardship is a necessity of everyday corporate life.

    Perhaps a model consisting of several regional venues might make sense. Several chancery courts could be strategically located for ease of access and other agreed upon factors. Two to three regional “Chancery Court Models” could serve the country well. The northeast/mid-Atlantic region is not the only part of the country that is a financial and cultural center.

    Excessive multiple forums could create huge legal spending. It is already contended that corporations and individuals spend in excess of several hundred billion dollars in legal fees annually (legalnewsline.com, legaldepartmenmanagementtblog.com, Pacific Research Institute). Frankly, I believe the real cost figure is significantly higher. Then if you throw in the costs of torts I’d venture to say that the costs approach a trillion dollars annually.

    The Delaware Court of Chancery has a rich intellectual and cultural history. It developed from English common law. It was created and designed to be a forum for the determination and settlement of disputes for thousands of Delaware corporations, and other business entities through which a huge amount of world commerce travels. It began in 1792. Its roots are traced to the King’s Chapel in feudal England where royal writs were issued. Common law proceedings evolved from the Chapel into a Court of Chancery providing judicial relief from issues caused by rigid procedures, corruption, and inadequate enforcement.

    The Court of Chancery was a court of equity which followed rules to avoid the slow pace of change and possible harshness (inequity) of the common (English) law. It initially focused on “conscientious law:” trusts, estates, and the guardianship of infants. It was also known as the “Keeper of the King’s Conscience.” Even feudal lords and royals understood that fairness, righteousness, and “civilized” behavior was better than not. Chaos and anarchy had to be avoided and controlled at any cost!

    And every King worth his salt knew full well that taxes had to be raised; a stable, happy society clearly produces more goods and services, and hence more tax revenues are generated. Bottom-line: the shareholder public must have confidence and faith in the integrity and professionalism of the Delaware “Court of Chancery Model.” Shareholders must be able to trust that their voices will be heard “equitably.”

    I share McRitchie’s concern about the “ultimate multi-forum nightmare.” The system could grind to a snail’s pace, and legitimate shareholder concerns would rarely be heard. It’s all about a delicate balance within a proven and genuine framework of trust and confidence.