Forum Selection BylawsFebruary 5, 2015
More than 90% of proposed M&A transactions valued at over $100 million are challenged by stockholders in court. In many cases, such actions are brought by stockholders in more than one jurisdiction, thereby requiring companies and their directors to litigate parallel claims in multiple forums. To minimize the risk of multi-jurisdictional litigation, over the past few years many public companies have adopted forum selection bylaw provisions that designate specific courts, often those courts in the corporation’s state of incorporation, as the exclusive venue for certain intra-company disputes, including derivative lawsuits, breach of fiduciary duty lawsuits, claims arising under the state’s corporation law, and claims relating to the internal affairs of the corporation.
In its 2013 Chevron decision, the Delaware Chancery Court found such exclusive forum provisions to be facially valid. The Court held that a corporation’s board of directors, if so empowered by the corporation’s charter or bylaws, may adopt an “exclusive forum” provision through a unilateral bylaw amendment as long as it is reasonable and fair. However, the enforceability of such provisions with respect to a particular dispute is assessed on a case-by-case basis, under the reasonableness standard applicable to any contractual choice-of-forum clause.
Significantly, late last year, the Delaware Supreme Court weighed in on forum selection bylaws. Although the issue was not expressly before the Court, its decision in United Technologies reaffirmed the enforceability of forum selection bylaws that are unilaterally adopted by a corporation’s board. The Court discredited a stockholder’s argument that a Delaware forum selection bylaw should not apply to him because it was approved by the board after he bought his shares. The Court cited the Chevron case in explaining that, because the defendant corporation’s bylaws expressly authorized the board to unilaterally amend such bylaws, such stockholder should have been on notice that the board may act to adopt a forum selection provision.
Since the landmark Chevron decision in Delaware, courts in several other states, including New York, Texas, California, and Illinois, have upheld forum selection bylaws, further demonstrating a general judicial willingness to honor such provisions. However, a recent Oregon case highlights the value of adopting a forum selection bylaw on a “clear day,” that is, before a reasonable threat of litigation.
In February 2014, the board of directors of TriQuint Semiconductor, Inc. approved an all-stock “merger of equals” with RF Micro Devices, Inc. At the same board meeting, the TriQuint board adopted a forum selection bylaw, designating Delaware as the exclusive forum for intra-company disputes. Notably, the board had agreed to the merger transaction shortly after a group of activist stockholders announced an intention to remove the corporation’s entire slate of directors at the next meeting of stockholders. Soon after the merger announcement, TriQuint stockholders filed lawsuits challenging the transaction in two jurisdictions: Delaware and Oregon.
The Delaware Chancery Court denied the stockholders’ request for expedited proceedings, finding that the stockholders’ allegations did not give rise to “a colorable claim” that the board of directors had breached fiduciary duties. TriQuint moved to dismiss the litigation in Oregon based on the corporation’s Delaware forum selection bylaw. However, the Oregon circuit court refused to enforce the bylaw, stating that to do so would be unfair and unjust and in violation of Oregon’s public policy. Though the court did acknowledge that the bylaw was facially valid, it found that enforcing the bylaw provision would be inequitable given the “closeness in time of the alleged wrongdoing” and the adoption of the bylaw, and the fact that the board appeared to have enacted the bylaw in anticipation of this exact lawsuit. The court did note that the bylaw would have been enforced had the board “adopted it prior to any alleged wrongdoing, and with ample time for shareholders to accept or reject the change.”
The Oregon decision in the TriQuint case contrasts with a Delaware Chancery Court decision, delivered less than a month later, upholding a forum selection bylaw under substantially similar facts. There, the bylaw in question was adopted by the board of directors on the same day as the defendant corporation announced it had entered into a merger agreement.
One distinction in the Delaware case was that the board had selected North Carolina (rather than Delaware) as the exclusive forum for intra-corporate disputes, as the corporation was headquartered and conducted most of its operations in that state. As an initial matter, the Chancery Court upheld the facial validity of the bylaw provision, noting that nothing in the reasoning of the Chevron case prohibits directors of a Delaware corporation from designating an exclusive forum other than Delaware.
The Chancery Court rejected the stockholders’ challenge to the enforceability of the forum selection provision, holding that they had failed to demonstrate that it would be unreasonable, unjust, or inequitable to enforce such provision. The court emphasized that the corporation’s stockholders were on notice, at the time they purchased the corporation’s stock, that the board could unilaterally amend the company’s bylaws at any time. The court further noted that the fact that the forum selection bylaw was adopted by the board “on an allegedly cloudy day” is immaterial given the lack of any allegations evidencing “impropriety” in this timing.
The Chancery Court’s decision seems to be in direct conflict with the Oregon state court’s decision in Roberts, and indeed the Chancery Court explicitly stated in a footnote that, to the extent the Oregon court purported to apply Delaware law, it was “based on a misapprehension of Delaware law.”
Proxy Advisor and Stockholder Considerations
Despite recent case law generally in favor of the validity and enforceability of forum selection bylaws, prior to adopting such a provision, boards might want to first consider the likely response such action will trigger from stockholders and proxy advisors.
Institutional Shareholder Services Inc. (“ISS”) and Glass Lewis & Co., LLC (“Glass Lewis”) each recently published updated recommendations and policy guidelines for the 2015 proxy season. Both proxy advisory firms generally look unfavorably on exclusive forum provisions, taking the position that they are not in the best interests of stockholders. The 2015 guidelines for each of ISS and Glass Lewis include recommendations with respect to both (1) forum selection bylaws that are approved unilaterally by a corporation’s board without stockholder approval, and (2) forum selection bylaws that are presented by the board for approval by stockholders at an annual or special meeting.
With respect to unilaterally adopted provisions, ISS’s position is that stockholders should generally vote against, or withhold from, directors individually, committee members, or the entire board, if the board unilaterally amends the company’s bylaws or charter in any manner that materially diminishes stockholders’ rights or that could adversely impact stockholders. Glass Lewis recommends a vote against the governance committee chair if a corporation’s board adopted a forum selection bylaw without stockholder approval in the past year.
With respect to bylaws that are presented for stockholder approval, the positions of ISS and Glass Lewis are slightly less rigid, though certainly still critical. ISS has adopted a case-by-case approach to such bylaw proposals, taking into account the following:
- The company’s stated rationale for adopting such a provision;
- Disclosure of past harm from shareholder lawsuits in which plaintiffs were unsuccessful or that were outside the jurisdiction of incorporation;
- The breadth of application of the bylaw, including the types of lawsuits to which it would apply and the definition of key terms; and
- Governance features such as stockholders’ ability to repeal the provision at a later date (including the vote standard applied when shareholders attempt to amend the bylaws) and their ability to hold directors accountable through annual director elections and a majority vote standard in uncontested elections.
Notwithstanding this stated “case-by-case” approach, ISS has consistently recommended that stockholders vote against such provisions.
Similarly, Glass Lewis recommends that stockholders vote against exclusive forum provisions unless the corporation:
- Provides a compelling argument on why the provision would directly benefit stockholders;
- Provides evidence of abuse of legal process in other, non-favored jurisdictions;
- Narrowly tailors such provision to the risks involved; and
- Maintains a strong record of good corporate governance practices.
Further, if a board seeks shareholder approval of a forum selection clause pursuant to a “bundled” bylaw amendment that includes multiple other changes, rather than as a separate proposal, Glass Lewis will recommend a vote against the corporation’s governance committee chair.
In addition, many shareholders and shareholder groups, including AFL-CIO and the Council of Institutional Investors, continue to adamantly oppose all exclusive forum provisions.
The facial validity of forum selection bylaws adopted unilaterally by a corporation’s board appears to now be firmly settled, at least under Delaware law. However, some uncertainty remains as to whether other state courts will enforce forum selection bylaws, particularly if adopted by the board on a so-called “cloudy day” in connection with any other significant corporate transaction that could reasonably be anticipated to give rise to litigation. As a result, forum selection bylaws adopted independently from, and in advance of, any major corporate events are better positioned to withstand subsequent challenges.
This is not to say that a corporation on the verge of a major transaction that does not then have a forum selection bylaw in place should rule out adopting one in connection with such transaction. Indeed, even if a court declines to enforce the bylaw because it was adopted by the board on a cloudy day, the corporation will likely be in no worse of a position than it otherwise would have been. In both instances, the corporation will likely be subject to duplicative litigation in multiple jurisdictions. Further, the Oregon court’s decision in Roberts appears to be an outlier – and most courts facing the issue since Chevron have enforced exclusive forum bylaws, even if enacted in connection with a merger or acquisition.
Finally, the value afforded by exclusive forum provisions depends on the company’s risk of being subject to multi-jurisdictional litigation. Prior to adopting such a provision, boards should carefully consider company-specific issues and concerns, including the potential impact of any negative responses from stockholders and proxy advisors.
For further information about our Mergers & Acquisitions practice.
 Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch., 2013).
 United Technologies Corp. v. Treppel, No. 127, 2014 (Del., Dec. 23, 2014).
 Hemg Inc. v. Aspen Univ., 2013 NY Slip Op 32871(U) (N.Y. Sup. Ct. Nov. 14, 2013).
 In re MetroPCS Communs., Inc., 391 S.W.3d 329 (Tex. App. Dallas, 2013).
 Groen v. Safeway Inc., No. RG14716641 (Super. Ct. of Cal., Alameda County, May 14, 2014).
 Miller v. Beam Inc., No. 2014 CH 00932 (Cook Co. Ill. Ct., March 5, 2014).
 Roberts vs. TriQuint Semiconductor, C.A. No. 1402-02441 (Cir. Ct. Ore., Aug. 14, 2014).
 City of Providence v. First Citizens BancShares, Inc., 99 A.3d 229 (Del. Ch., 2014).
 An Ohio federal court has also recently rejected the Oregon court’s analysis, stating that forum selection provisions are not unenforceable simply because they were adopted by corporation’s board subsequent to the purported wrongdoing. North v. McNamara, 2014 U.S. Dist. LEXIS 131672 (S.D. Ohio, Sept. 19, 2014).