Multiple New Suits Challenge Exclusive Forum Selection Bylaws in Delaware Court of Chancery

We typically focus on summarizing corporate and commercial decisions of Delaware’s Supreme Court and Court of Chancery, but today we find noteworthy a bevy of new lawsuits just filed in the Delaware Court of Chancery.

These new suits challenge bylaws in several companies that require shareholder suits to be filed exclusively in the Delaware Court of Chancery.  If suits are filed elsewhere, the company threatens to sue those shareholders to recoup fees for breach of the bylaw provision. The challenge is based on the alleged violation of due process rights because there was no mutual consent by the shareholders. The suits were filed by the highly-regarded corporate litigator Michael Hanrahan of the Prickett Jones firm in Wilmington. Among the companies sued by shareholders challenging the exclusive forum bylaw provision, in separate lawsuits, are the following Delaware corporations:

Navistar International Corp., AutoNation, Inc. Chevron Corp., SPX Corp., Superior Energy Services, Inc., Franklin Resources, Inc., Curtiss-Wright Corp., Danaher Corp., and Solutia Inc.

Friend of this blog and well-recognized corporate law expert, Professor Stephen Bainbridge, provides timely comments on these new lawsuits. Thomson Reuter’s Alison Frankel wrote an excellent article about these cases that provides a very helpful overview and also has a link to the actual complaints. Broc Romanek on his site called The Corporate Counsel.net, provides helpful observations on this development.

The concept of a forum selection clause in a corporate charter was given momentum by the dicta and citations to Delaware decisions and law review articles, in Vice Chancellor Laster’s footnote 8 in his opinion in the case of In Re Revlon, Inc. Shareholders Litigation, Consol. C.A. No. 4578-VCL (Del. Ch. March 16, 2010), read opinion here.

Scholarship on the Topic

Corporate law scholars have written extensively about this topic and we have featured much of that scholarship on these pages. For example, Professor Joseph Grundfest of Stanford, one of the early promoters of the idea of adding a charter provision (as compared with a bylaw provision), with an exclusive forum selection clause for shareholder suits, presented a lecture in Delaware before the Bench and Bar on the issue, as discussed on these pages here . Prof. Steven Davidoff provided insights on the topic here. Ted Mirvis of Wachtell Lipton, who often litigates high-stakes matters in the Delaware Court of Chancery, has also been credited with this particular forum-selection concept, as indicated in his 2007 article available here.

Although Delaware Courts have not squarely decided the issue of a forum selection clause in a bylaw provision, that is not voted on by the shareholders, a California court struck down a provision in a case noted on these pages here. Professor Bainbridge comments on the topic here.  Prof. Brian J.M. Quinn wrote a law review article on the issue, available here.

Our post here  on this topic and related issues, includes commentary by the late, great scholar Prof. Larry Ribstein and others who have addressed the related problems with multi-jurisdictional litigation and the challenges that arise with an apparent increase in the number of non-Delaware courts deciding issues of Delaware corporate law. A ruling on these new cases by the Delaware Court of Chancery, which will likely be appealed to the Delaware Supreme Court, will be a welcome addition to provide a measure of certainty on this cutting edge topic.

Supplement: Corporate attorney Claudia Allen prepared a study of Delaware forum selection clauses in charters and bylaws that is available via a post by Professor Bainbridge here. Delaware litigator Edward Micheletti has written an article on the issues of multi-jurisdictional litigation that these bylaw amendments are attempting to address. Kevin La Croix on his blog called The D & O Diary compiles articles and statistics and related sources on the various issues related to an increase in M& A/Takeover litigation here  including multi-jurisdictional aspects of that litigation here.

The Wilmington News Journal has an article co-authored by Phil Milford that examines average awards of attorneys’ fees in cases challenging deals even when it is not apparent if the shareholders are receiving a quantifiable benefit from the lawsuit.