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E-MailRichard J. Sandler is a partner at Davis Polk & Wardwell LLP and co-head of the firm’s global corporate governance group. This post is based on a Davis Polk client memorandum by Mr. Sandler, Arthur F. Golden, and William M. Kelly. 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.
Exclusive forum provisions in corporate bylaws and certificates of incorporation are back on the agenda for many companies. We reviewed the trend data in a June 2012 briefing and predicted that few companies would adopt exclusive forum provisions until there was guidance from then-pending litigation in the Delaware Court of Chancery. That guidance came this past June in the form of Chancellor Strine’s decision upholding the validity of board-adopted exclusive forum bylaw provisions at Chevron and FedEx. Most recently the plaintiffs in that litigation dropped their appeal, so for now Chancellor Strine’s decision stands in support of the proposition that, unsurprisingly, Delaware views the selection of a Delaware forum as at least facially valid.
In the wake of these developments the adoption of exclusive forum provisions has resumed, and by our count there are now about 120 companies, largely but not exclusively Delaware corporations, that have gotten on board since the Chevron decision. While these are still small numbers in the context of several thousand U.S. public companies, we expect the number to continue to grow in the coming months.
Companies considering exclusive forum provisions should, we think, look not only at the tactical merits of these provisions in the context of stockholder litigation but also at the potential collateral consequences to the company’s overall governance position.
It is easy to see the attraction. An exclusive forum provision can in principle limit or even eliminate the plaintiff bar gamesmanship that can result in multiforum stockholder litigation. By channeling the litigation to a single highly knowledgeable court with a well-established body of precedent, an exclusive forum provision can save money and management distraction, lead to more predictable outcomes, and in general promote stockholder welfare. What’s not to like?
To start with, exclusive forum provisions are not self-enforcing. A company seeking to enforce the provision in the face of litigation outside of Delaware will have to move to dismiss the case. The non-Delaware judge considering the motion may be influenced, but will not be bound, by the Chevron decision. We may imagine, and some have confidently predicted, that over time a body of law will develop upholding these provisions under the internal affairs doctrine. But that day has not yet arrived, and in the meantime companies will have to fund some level of litigation to defend their position. These companies may, like Chevron and FedEx, have the satisfaction of having moved the law in a positive direction, but others may be happy to have the trailblazers reap the honor.
Even assuming enforceability, though, there remains the question of stockholder reaction. It is not yet clear where the consensus of stockholder opinion lies on this issue. The governance advisory services are, for largely unpersuasive reasons, mildly (ISS) or firmly (Glass-Lewis) negative. The stockholder voting patterns in the few cases that have come to a vote are inconclusive. And the tactical response of the activist stockholder community to a new wave of exclusive forum provisions is yet to be seen. If, as with most companies, the exclusive forum provision would be a board-adopted bylaw, boards should consider the possibility of future stockholder proposals, withhold recommendations against governance chairs, and other potential tactical responses. All of these may be withstood, but prevailing may consume time and effort and stockholder goodwill.
So the question for most boards will come down to this: how much do we care about this issue? There are certainly companies that, as a matter of principle or because they have been plagued by multiforum stockholder litigation, will decide to be in the vanguard on an innovation that, if widely adopted, would be a positive development in corporate governance. Companies that take this step should make sure that they have a well-developed board record supporting the decision and a communications plan to explain the benefits of an exclusive forum provision.
But a well-considered decision may not be enough. Remember that the last wave of exclusive forum provisions was halted by a tactical response (the filing of the Chevron litigation) that caused numerous companies to reverse course. With that history in mind, we think that for now many companies are likely to stay on the sidelines as spectators rather than potential combatants as the contest continues to unfold.
