CONTRIBUTED BY: John Reed and Anthony Kappus

Many existing and startup corporations are considering adding forum-selection provisions to their governing documents requiring shareholder derivative and other intra-corporate lawsuits to be filed with courts in a specified location, or “venue,” often naming the Delaware Court of Chancery as the sole court in which such actions may be filed.  The issue has been the subject of much discussion since the March 2010 Delaware Court of Chancery opinion in In re Revlon, Inc. Shareholders Litigation, suggesting in dicta that corporations are free to adopt charter amendments that designate the jurisdiction for litigation of intra-corporate disputes.[1]

Post-Revlon, there has been a meaningful trend among both public and private companies towards adopting charter or bylaw provisions that designate Delaware as the exclusive jurisdiction for stockholder litigation.

This post gives a brief overview of the rationale for adopting an exclusive forum provision, a discussion of the enforceability of such exclusive forum provisions in governing documents and provides an example of text used to designate Delaware as the exclusive forum for intra-corporate disputes.

Rationale for Adopting an Exclusive Forum Provision

The primary reasons companies consider selecting Delaware as the exclusive forum for stockholder and other intra-corporate litigation are to limit or eliminate duplicative litigation of the same matter in multiple jurisdictions and to benefit from the potential advantages of litigating corporate matters in the Delaware Court of Chancery.

Duplicative litigation in multiple jurisdictions is a significant problem, particularly in connection with the stockholder lawsuits that are often brought challenging merger and acquisition transactions involving public companies. With no forum selection clause in place, there is no reason for plaintiffs in such suits to file in Delaware, or in any single jurisdiction. In fact, counsel for one or more plaintiffs may be incentivized to file suit in multiple jurisdictions to increase the likelihood of a lead counsel appointment and/or fee award. Because there is no uniform system in place for such litigation to be removed to Delaware and the local courts may refuse to stay their action(s) while the Delaware case(s) proceed, companies are increasingly faced with the prospects of litigating, and even settling, disputes concerning the same issues in multiple jurisdictions. The tremendous costs and uncertainty of such multi-jurisdictional litigation may be avoided with a provision selecting Delaware as the exclusive forum for such stockholder litigation, assuming such provisions are enforced by the various courts where such actions are filed. 

The potential advantages to Delaware corporations and their stockholders of litigating corporate law matters in the Delaware Court of Chancery include the guidance and predictability provided by Delaware’s extensive body of corporate law decisions, an extremely experienced judiciary that is willing to dismiss meritless suits at early stages, the resolution of disputes far more quickly than other jurisdictions, the inability to seek punitive damages and a jury trial in the Court of Chancery (a court of equity), the lack of  political influence (the judges are not elected and the state constitution mandates political balance) and direct appeal to the Delaware Supreme Court where all of aforementioned-advantages continue.

Enforceability of an Exclusive Forum Provision

The enforceability of Delaware exclusive forum provisions, particularly in courts outside of Delaware, remains something of an open question. Their enforceability under the Delaware General Corporation Law has not been conclusively established, although the dicta in Revlon would support enforceability if advance stockholder approval was obtained for the provision, whether it is included in the bylaws or charter.

However, in Galaviz v. Berg, a federal court in California ruled that a bylaw amendment adopting a Delaware exclusive forum clause was not enforceable where the amendment was approved by the board of directors without a stockholder vote after the events giving rise to the litigation had occurred (though at the time of adoption of the provision, no suit had been filed).[2]

In light of the Galaviz decision, if an exclusive forum provision is desired, including it in a charter amendment after obtaining requisite stockholder approval for such amendment is recommended. In early-stage companies, this type of provision could be included at the time of initial formation or in connection with amendments to the company’s charter done for other reasons (such as equity financings), well before the prospects of an IPO. 

An Example of an Exclusive Forum Provision     

Here is an example of language designating Delaware as the exclusive forum for intra-corporate litigation, published by the Harvard Law School Forum on Corporate Governance and Financial Regulation:

The Court of Chancery of the State of Delaware shall be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Corporation, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director or officer of the Corporation to the Corporation or the Corporation’s stockholders, (iii) any action asserting a claim against the Corporation arising pursuant to any provision of the DGCL [(Delaware General Corporation Law)] or the Corporation’s Certificate of Incorporation or Bylaws, or (iv) any action asserting a claim against the Corporation governed by the internal affairs doctrine. [3]

[1] In re Revlon, Inc. Shareholders Litig., 990 A.2d 940, 960 (Del. Ch., 2010).

[2] Galaviz v. Berg, No. 10-cv-3392, slip op. (N.D. Cal. Jan. 3, 2011).