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E-MailRobert B. Little is partner in the Mergers and Acquisitions group at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn publication by Mr. Little and Chris Babcock. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.
The Delaware Court of Chancery’s endorsement of exclusive forum bylaws—bylaw provisions establishing that certain types of lawsuits relating to internal corporate governance matters may only be pursued in a designated forum—has led to the extensive use of these bylaws as a way to manage the litigation that commonly accompanies public mergers and similar transactions. In particular, following the decision in City of Providence v. First Citizens BancShares, [1] where the Court determined that it was not a per se violation of a board’s fiduciary duties to adopt exclusive forum bylaws in the context of an upcoming acquisition, it appears that public company targets have more often than not adopted these provisions. Examining a sample of public M&A deals taking place after City of Providence, we found that the target adopted exclusive forum bylaws prior to or at the time of the acquisition in over two-thirds of the deals reviewed. This finding suggests that adoption of such bylaw provisions is becoming a routine part of public M&A practice.
Background
Since 2010, more than 90% of public M&A deals valued over $100 million have involved shareholder litigation, the majority of which leads to “disclosure only” settlements—settlements where a defendant corporation pays some portion of the plaintiffs’ legal fees and makes additional disclosures but does not provide any additional monetary consideration to shareholders. [2] Much of this litigation has been viewed as amounting to a “deal tax” that increases the costs of M&A transactions. [3] Because a significant number of public M&A transactions involve shareholder lawsuits filed in more than one jurisdiction, companies have developed and adopted exclusive forum bylaws as a way to reduce costs arising out of this multi-jurisdictional litigation. [4]
Market Practice
Following decisions such as City of Providence, target companies involved in public mergers and acquisitions now typically adopt exclusive forum bylaws prior to or contemporaneous with the announcement of a transaction. We reviewed 38 Delaware public M&A deals announced after the Court’s decision in City of Providence. [5] In 17 of the 38 acquisitions, the target announced that it had adopted exclusive forum bylaws at the same time it announced the deal. Targets had adopted exclusive forum bylaws prior to the deal in an additional 10 acquisitions.
Our research indicates that Delaware targets involved in public M&A transactions had exclusive forum bylaws in place in over 70% of recent transactions. If a Delaware target did not have exclusive forum bylaws in place prior to the public announcement of a transaction, it adopted such bylaws at the time of such announcement over 60% of the time.
Considerations in Adopting Exclusive Forum Bylaws
A board considering whether to adopt exclusive forum bylaws should weigh three important considerations: (i) its fiduciary duties, (ii) the concerns of company shareholders, and (iii) how such provisions will be treated by courts in jurisdictions other than the designated forum.
City of Providence held that the plaintiff’s “conclusory” assertion that a board’s adoption of exclusive forum bylaws violated its fiduciary duties failed to state a claim upon which relief could be granted. [6] The opinion is best read, however, as establishing the business judgment standard of review for the decision to adopt exclusive forum bylaws, so long as a plaintiff is not able to rebut the presumption that such standard applies. [7] Accordingly, a board of directors considering the adoption of exclusive forum bylaws should document its decision-making process and ensure that no director voting on the matter has a personal interest in directing litigation to the selected forum. [8]
In addition, boards should take into account the views of shareholders in determining whether to establish exclusive forum bylaws. Institutional Shareholder Services (“ISS”), an influential proxy advisory firm, has taken the position that it will make recommendations “case-by-case on bylaws which impact shareholders’ litigation rights,” [9] although at this time we are not aware of ISS recommending votes “against” any individual directors solely on account of board adoption of exclusive forum bylaws. Glass Lewis, another such firm, will generally recommend votes “against” a board’s nominating/governance committee chair if the board unilaterally adopts exclusive forum bylaws. [10] However, an adverse recommendation on director elections from a proxy advisory firm may be less concerning to the target company’s board, which may never face reelection if the deal is completed.
Finally, boards should carefully consider the forum selected by exclusive forum bylaws and whether courts in other relevant jurisdictions will uphold such bylaws. Although City of Providence upheld the validity of a provision establishing North Carolina courts as the exclusive forum for certain litigation, recently proposed amendments to the Delaware General Corporation Law would prohibit bylaw provisions that restrict the ability to bring claims in Delaware. [11]
Conclusion
Exclusive forum bylaws can be an effective tool to reduce costs of the litigation that inevitably surrounds public M&A transactions, and our data indicates that, in a majority of these transactions, public company M&A targets will adopt (or already have in place) exclusive forum bylaws. Public company M&A targets that do not already have such bylaws in place should consider adopting them concurrently with the announcement of a deal. Consider it one more item to add to your public M&A deal checklist.
Endnotes:
[1] 99 A.3d 229 (Del. Ch. 2014).
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[2] Cornerstone Research, Shareholder Litigation Involving Acquisitions of Public Companies: Review of 2014 M&A Litigation, available at: https://www.cornerstone.com/GetAttachment/897c61ef-bfde-46e6-a2b8-5f94906c6ee2/Shareholder-Litigation-Involving-Acquisitions-2014-Review.pdf (the “Cornerstone Report“). The Cornerstone Report found that 75% or more of the settlements it examined were disclosure only settlements in each year since 2010.
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[3] Frankel, Alison, “What Motorola settlement says about shareholder M&A litigation,” Nov. 10, 2011, available at: http://blogs.reuters.com/alison-frankel/2011/11/10/what-motorola-settlement-says-about-shareholder-ma-litigation/.
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[4] See the Cornerstone Report, note 2 supra, at 3 (showing that in 2012, the last full year before the Delaware Court of Chancery upheld exclusive forum bylaws, 60% of M&A litigation involved two or more jurisdictions—but that only 40% of M&A litigation involved two or more jurisdictions in 2014, reflecting in part the growing use of exclusive forum bylaws).
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[5] We searched for transactions involving more than $100 million with a Delaware target that were announced in or after November 2014, and excluded certain deal types (partial stake acquisitions, repurchases, etc.).
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[6] City of Providence, 99 A.3d at 237.
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[7] Id. at 237 (“Given the absence of any such facts [calling into question the integrity of a selected forum or explaining how directors are self-interested] and the wholly conclusory allegations upon which Count II of the Bylaw Complaint is predicated, Providence has failed to rebut the presumption of the business judgment standard of review that attaches to the Board’s adoption of the Forum Selection Bylaw …”); see also Boilermakers Local 154 Retirement Fund v. Chevron, 73 A.3d 934, 963 (Del. Ch. 2013).
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[8] At least one court has found that a board violated its fiduciary duties by adopting exclusive forum bylaws in connection with an acquisition. See Roberts v. TriQuint Semiconductor, Inc., No. 1402-02441, 2014 WL 4147465 (Or. Cir. Ct. Aug. 14, 2014); but see City of Providence, 99 A.3d at 242, n.52 (noting that TriQuint, to the extent purporting to apply Delaware law, was “based on a misapprehension of Delaware law”).
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[9] Institutional Shareholder Services, “United States Proxy Voting Guideline Updates,” Nov. 6, 2014, page 7, available at: http://www.issgovernance.com/file/policy/2015USPolicyUpdates.pdf.
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[10] Goodman et al., Considerations for Public Company Directors in the 2015 Proxy Season and Beyond, Feb. 6, 2015, available at: http://www.gibsondunn.com/publications/pages/Considerations-for-Public-Company-Directors-in-2015-Proxy-Season-and-Beyond.aspx.
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[11] The proposed amendments would add a new Section 115 to the Delaware General Corporation Law, which would state:
The certificate of incorporation or the bylaws may require, consistent with applicable jurisdictional requirements, that any or all intracorporate claims shall be brought solely and exclusively in any or all of the courts in this State, and no provision of the certificate of incorporation or the bylaws may prohibit bringing such claims in the courts of this State. “Intracorporate claims” means claims, including claims in the right of the corporation, (i) that are based upon a violation of a duty by a current or former director or officer or stockholder in such capacity, or (ii) as to which this title confers jurisdiction upon the Court of Chancery.
A copy of the full text of the proposed amendments is available at: http://www.delawarelitigation.com/files/2015/03/COUNCIL-SECOND-PROPOSAL-U01245103.doc.
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