|July 23, 2013|
Previously published on July 19, 2013
In a much anticipated decision, the Delaware Court of Chancery (Chancellor Strine) in Boilermakers Local 154 Retirement Fund v. Chevron Corporation and IClub Investment Partnership v. FedEx Corporation1 significantly "advanced the ball" in an effort to combat the cost-inefficiencies, management and board distraction, and potentially inconsistent judicial results, inherent in defending against (duplicative) multi-jurisdictional litigation arising from the same suite of facts and circumstances in a single challenged transaction (or series of related transactions). In his judgment on the pleadings, Chancellor Strine upheld, on both a statutory and contractual basis, the facial validity of exclusive Delaware litigation forum bylaws adopted unilaterally by the board of each of Chevron Corporation (Chevron) and FedEx Corporation (FedEx). In doing so, he likened the authority of Delaware directors to adopt such bylaws to the authority of directors to unilaterally adopt a stockholder rights plan or "poison pill" as a reasonable response to a validly perceived threat to corporate policies and effectiveness. (The threat here being the adverse consequences and potential damage to the corporation of defending against redundant, multi-forum litigation, the costs of which ultimately are borne by the corporation’s stockholders.)
The prevalence of multi-forum litigation promptly following the public announcement of an extraordinary corporate transaction (such as a merger or business combination) has increased substantially in recent years. These actions can be difficult, or take considerable time, to “stay” or consolidate. Similarly, there has been a significant uptick in the last 18 months in threats by certain “strike suit” plaintiff law firms to commence state court breach of fiduciary duty and corrective disclosure litigation with respect to failed “say-on-pay” precatory votes and with respect to proposed amendments to equity compensation plans and similar executive arrangements for which stockholder approval is being sought at the annual meeting. This latter category of actions, which involve “strawman plaintiffs” who own a nominal amount of shares and threaten to seek injunctions against convening the annual meeting, are often threatened and commenced in jurisdictions other than the issuer’s jurisdiction of incorporation. In response to these trends, various iterations of exclusive litigation forum bylaws have been adopted (to date by more than 250 corporations), some of which have been challenged in various non-Delaware courts.
The bylaws adopted by both Chevron and FedEx designated Delaware (their jurisdiction of incorporation) as the exclusive forum for stockholder derivative lawsuits, fiduciary duty lawsuits, lawsuits arising under and involving interpretations of the Delaware General Corporation Law (DGCL) and lawsuits animating Delaware’s “internal affairs doctrine.”
In response to plaintiffs’ challenge to the statutory validity of Chevron’s and FedEx’s exclusive forum bylaws, Chancellor Strine concluded that the unilateral adoption thereof was well within the statutory authority of the board of both Chevron and FedEx. He noted that in order for the plaintiffs’ statutory challenge to have merit, the bylaws in question would need to fall outside of the ambit of Section 109(b) of the DGCL, and constitute an improper subject matter for a corporation’s bylaws. Chancellor Strine rejected plaintiff’s arguments and cited to the text of Section 109(b), which expressly provides that the bylaws of a Delaware corporation may “contain any provision, not inconsistent with law or with the [corporation’s] certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees.” He observed that the exclusive forum bylaws were procedural in nature and addressed only where certain enumerated types of litigation must be brought, not whether such litigation (or any other type of litigation) can be brought or the nature of the remedies available in any such litigation.
With respect to the plaintiffs’ assertion that, as a contractual matter, the bylaw amendments should not be enforceable against stockholders who were denied an opportunity to affirmatively vote for their adoption and that the stockholders acquired a preexisting, vested interest in the bylaws that were in effect at the time of their investment, Chancellor Strine noted that such bylaws are analogous to the exclusive forum provisions of other contracts. He observed that, consistent with Section 109(b) of the DGCL, the certificate of incorporation of each of Chevron and FedEx expressly authorized the Board of each corporation to adopt bylaws unilaterally (i.e., without stockholder approval). Therefore, he reasoned that whenever a stockholder invests in a corporation whose certificate of incorporation permits the board to adopt bylaws unilaterally, such stockholder has been put “on notice” that the bylaws can be amended by the board at any time, and from time to time, without advance notice and without first seeking stockholder approval.
Notwithstanding the decision, the validity of the adoption of Chevron’s and FedEx’s bylaws as a proper exercise of the board's statutory and organic (contractual) authority does not preclude, and will not necessarily deter, future litigation alleging that the board’s adoption, use or application of such bylaws in a particular circumstance is unreasonable, unfair or inequitable, or that the adoption, use of application of such bylaws by the board under a particular set of facts and circumstances constitutes a breach of fiduciary duty. Indeed, Chancellor Strine cautioned that his decision addressed only the facial validity of the exclusive forum bylaws and that the enforceability thereof in any future action or dispute would be subject to judicial review on a case-by-case basis, under the reasonableness standard applicable to “choice of forum” clauses announced by the U.S. Supreme Court in The Bremen v. Zapata Off-Shore Co.2
Moreover, it is not entirely certain how the Delaware Supreme Court may rule when presented with these issues. However, Chancellor Strine's decision and analyses are likely drawn narrowly enough (statutory and contractual, facial, and validity) to be left unaltered by the Delaware Supreme Court. It is also possible (although not anticipated at this time) that the Delaware legislature could pick up the gauntlet on this subject in the future.
To the extent that certain institutional investors believe that the unilateral adoption and use of exclusive forum bylaws are inappropriate, they can always avail themselves of the proxy machinery to seek to implement organic change (e.g. repeal or amendment of the bylaws or a precatory proposal to amend the certificate of incorporation) or seek board compositional change.
At present, it appears that the ISS will continue to review exclusive forum selection bylaws on a case-by-case basis, taking into account whether, in its judgment, the corporation follows good corporate practices (i.e., the absence of a classified board, the absence of “poison pill” not submitted for stockholder approval, and majority voting in the election of directors) and whether the corporation suffered past material harm as a result of defending multi-jurisdictional litigation. Moreover, it appears that Glass-Lewis will continue to generally recommend against exclusive forum bylaws and recommend "withhold authority" against the Chairman of the Corporate Governance Committee in the case of such bylaw adopted unilaterally by the board.
The adoption of an exclusive litigation forum bylaw (of the type facially validated by the Delaware Court of Chancery) is not a “one-size-fits-all” exercise for every corporation. As with all corporate decisions involving structural, organic and transactional matters, context is key and the decision must make sense in light of all prevailing facts and circumstances. That written, we recommend that corporations (irrespective of their jurisdiction of incorporation) should examine the merits of adopting exclusive litigation forum bylaws (whether by unilateral amendment of the bylaws, or otherwise) in view of Delaware’s recent decision, and to combat the potential damaging and costly impact of multi-jurisdictional litigation in today’s litigious environment.
1 C.A. No. 7220-CS (Del. Ch. June 25, 2013); C.A. No. 7238-CS (Del. Ch. June 25, 2013).
2 407 U.S. 1 (1972).