The movement toward exclusive forum provisions, which as we recently discussed had been gathering steam over the past couple of years, is under attack and is for the moment, we believe, in retreat. Although some 200 companies have adopted exclusive forum provisions since 2010, mostly in the form of board-adopted bylaws, recent litigation in Delaware has caused some companies to dismantle these bylaws and numerous others to defer consideration of the issue.
This recent shift illustrates what happens when a small group with strong preferences encounters a large group with less strong ones. The large group in this case is the companies. An exclusive forum provision mandating that shareholder litigation take place in Delaware does not eliminate shareholder litigation, but it channels it in a way that can avoid forum shopping and duplicative litigation and enhance predictability, since the Delaware courts handle these sorts of cases for a living. It is easy to conclude, as many companies have, that this is in the interests of shareholders, but most companies we’ve talked to view these provisions as “nice to have” rather than as a matter of critical importance.
The small group, of course, is the plaintiffs bar, for whom duplicative litigation and forum shopping are a feature rather than a bug, since they magnify uncertainty (and thus settlement value) and may facilitate finding a congenial place to make a fee application. Faced with a threat to their franchise, the plaintiffs bar determined to act preemptively, and sued about a dozen companies in the Delaware Court of Chancery for adopting exclusive forum bylaws. Plaintiffs also challenged charter amendment proposals by three companies. Suing in Delaware was an interesting tactical decision, since Chancery, with its natural interest in upholding the primacy of the Delaware courts, might have been thought to be the court most likely to uphold these provisions.
Faced with this unexpected development, the defendants faced the dilemma of whether to invest time and money defending litigation over a provision that had been promoted as a device to reduce litigation. Not surprisingly, the great bulk of the companies chose to reverse course, repealing the exclusive forum bylaws provisions and mooting the pending litigation. Two of the three companies whose charter amendment proposals were challenged also withdrew the proposals in response.
Leaving the field of battle may not be for free, however. The plaintiffs filed fee applications seeking approximately $400,000 in each bylaw case and $500,000 in each charter proposal case. Ten of the thirteen mooted cases reached settlement agreements earlier this week for undisclosed amounts. The other three fee petitions remain pending.
This leaves two companies, Chevron and FedEx, continuing to litigate the validity of their bylaws. Chevron has also been sued in a copycat action in federal court in California, and has moved to stay or dismiss the California action.
How do shareholders feel about these provisions? The evidence is inconclusive. Of the five exclusive forum provisions that were to have been on the ballot in 2012, two were approved, two were withdrawn and one voted down. In addition, shareholder proposals seeking to remove exclusive forum provisions at two companies (including Chevron) failed to pass. While labor unions and other shareholder groups traditionally aligned with the plaintiffs bar will invariably oppose exclusive forum provisions, the voice of the majority of institutional shareholders has not yet been heard clearly.
Now that adopting an exclusive forum bylaw has turned out not to be costless, we expect most companies to wait for guidance from the Court of Chancery before taking further action in this area.