These days almost every public company that announces an agreement to sell itself can expect to be the subject of multiple shareholder class actions challenging the transaction – even if shareholders will be receiving a blowout price for their shares under the terms of the agreement. Many of these cases are baseless, and are brought by plaintiffs hoping to leverage a quick settlement. Their strategy, in blunt terms, is to force a speedy payment by threatening to disrupt or stall the deal. Unfortunately, even if the litigation presents only a small risk of disrupting or delaying the deal, many companies feel obligated to settle rather than risk upsetting the deal.
It’s bad enough that target companies and their boards are forced to deal with these “worthless” “sue-on-every-deal cases,” as Delaware Vice Chancellor Travis Laster once described them, but they often have to deal with them in multiple jurisdictions. Indeed, rarely are shareholder class actions challenging a merger brought in a single forum. Instead, companies and their boards are forced to expend time and money defending against duplicative lawsuits in multiple fora around the country.
To address the increasing and expensive problem of multi-forum shareholder litigation, many boards of Delaware corporations adopted exclusive forum bylaw provisions that require shareholder class and derivative actions alleging breach of fiduciary duties to be litigated exclusively in Delaware. Plaintiffs, in turn, filed suits in the Delaware Court of Chancery against a number of Delaware corporations with board-adopted forum selection bylaws, alleging that such bylaws were invalid under the Delaware General Corporation Law (DGCL) and unenforceable under contract law because they were adopted unilaterally without shareholder consent.
Yesterday, in a much anticipated decision, Chancellor Strine of the Delaware Court of Chancery held that an exclusive forum bylaw provision adopted unilaterally by a board is both facially valid under the DGCL and an enforceable contractual forum selection clause. The bylaw that Chancellor Strine upheld (adopted by the boards of both Chevron Corporation and FedEx Corporation) provides that the Delaware Court of Chancery will be the sole and exclusive forum for (i) any derivative action brought on behalf of the corporation, (ii) any action asserting breach of fiduciary duty claims, (iii) any action asserting a claim arising under the DGCL, or (iv) any action asserting a claim governed by the internal affairs doctrine.
The plaintiffs have indicated that they will appeal Chancellor Strine’s decision to the Delaware Supreme Court. However, if the decision is upheld, boards of Delaware public companies should seriously consider adopting similar bylaw provisions to protect themselves – and their shareholders – against the inefficiencies associated with duplicative strike suits in multiple jurisdictions.