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Adopt Forum Selection Bylaws to Reduce Litigation Tax




by:
William P. Mills
Cadwalader, Wickersham & Taft LLP - New York Office

 
October 14, 2013

Previously published on October 11, 2013

A simple, non-controversial modification to your company’s bylaws could provide substantial value by reducing unnecessary legal fees and accelerating the resolution of legal disputes.

A recent decision by the Delaware Chancery Court upheld the validity of forum selection bylaws and leaves little reason for not adopting the change. (Boilermakers Local 154 Retirement Fund v. Chevron Corp., et al., and IClub Investment Partnership v. FedEx Corp., et al.)

The decision provides corporations that have already adopted forum selection bylaws comfort they will be enforced. It also opens the door for corporations that have not adopted them to reevaluate the potential benefits of forum selection bylaws.

A forum selection bylaw eliminates the inefficient costs and burden of defending against the same claims in multiple courts at the same time. Other potential benefits include the avoidance of inconsistent decisions from courts in different jurisdictions, the ability for cases to be heard in a timely manner by highly regarded judges with extensive relevant expertise, and the elimination of a plaintiff’s ability to engage in forum shopping in order to present novel and complex cases in jurisdictions where corporate litigation is less frequent than in Delaware.

The bylaws upheld by the court in the FedEx case provide that any derivative action or proceeding brought on behalf of the corporation, any action asserting a breach of fiduciary duties or otherwise arising under the Delaware General Corporation Law (DGCL), and any other action relating to the internal affairs of the corporation must be brought in the Court of Chancery of the State of Delaware. The Chevron bylaws provide that these fundamental actions or proceedings must be brought in a state or federal court located within the state of Delaware. Over the past three years, more than 250 publicly traded companies have adopted similar provisions.

The court also concluded that the forum selection bylaws were contractually valid and enforceable, noting that the bylaws of a Delaware corporation constitute a binding contract among the directors, officers and stockholders of a corporation, and that the board of directors of a Delaware corporation may unilaterally adopt bylaws if it is permitted to do so under the company’s certificate of incorporation.



 

The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
 

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Author
 
William P. Mills
Practice Area
 
Litigation
Taxation
 
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