On December 10, 2015, the Oregon Supreme Court held that an exclusive forum bylaw provision adopted unilaterally by a Delaware company’s board was a valid and enforceable contractual forum selection clause. Importantly, the Oregon decision is the only reported non-Delaware appellate court decision to date addressing the validity of exclusive forum bylaws on the merits.
The decision, Roberts v. TriQuint Semiconductor, Inc., comes on the heels of the Delaware Court of Chancery’s forum bylaw ruling in Boilermakers Local 154 Retirement Fund v. Chevron Corporation. As previously noted on this blog, in Chevron, then-Chancellor Strine of the Delaware Court of Chancery held that an exclusive forum bylaw provision adopted unilaterally by a board was both facially valid under the Delaware General Corporation Law (“DGCL”) and an enforceable contractual forum selection clause. Citing Chevron, the Oregon Supreme Court similarly concluded that an exclusive forum bylaw adopted only two days prior to the announcement of a merger was permissible and did not render the bylaw unenforceable in the shareholder merger litigation that followed.
Back in May we discussed ATP Tour, Inc. v. Deutscher Tennis Bund a seminal Delaware Supreme Court case that upheld a non-stock corporation’s “loser pays” fee-shifting bylaw. ATP Tour held that where a Delaware corporation adopts a fee-shifting bylaw, it can recover its fees and costs from any shareholder that brings a derivative lawsuit and loses. Many commentators have suggested the case would effectively kill derivative actions in Delaware and indeed, since the time of that decision, the Delaware Corporation Law Council has proposed amendments to the Delaware General Corporation Law that would limit its applicability to only non-stock corporations.
Last week the Oklahoma State Legislature went a step further than ATP Tour and amended the Oklahoma General Corporation Act to specifically require fee-shifting for all derivative lawsuits brought in the state, whether against an Oklahoma corporation or not. Unlike the fee provision in ATP Tour, however, the law also affords derivative plaintiffs the right to recover their fees and costs should they win final judgment.
The difference is likely substantial. For while the law will potentially chill unmeritorious derivative actions, also known as “strike suits,” it could also provide an incentive for derivative plaintiffs with strong claims. Where shareholders use the “tools at hand”—including books and records inspection requests—to carefully vet their claims before filing, the promise of a fee recovery could encourage shareholder plaintiffs to bring claims they otherwise might not.
Consider: in the typical derivative lawsuit, the shareholder plaintiff stands to gain nothing tangible if he or she wins. Because he or she is suing on behalf of the corporation, any recovery will inure to the corporation itself. Thus, under the old regime, even if a derivative lawsuit was successful, the plaintiff would receive, at most, any resulting increase in the value of his or her company stock. Under the new statute, that same plaintiff could stand to receive the not-insubstantial costs of his or her efforts.
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. READ MORE