Search results for: forum-selection clause

The following article is reprinted with permission from the Jan. 15, 2020 edition of “The Delaware Business Court Insider”, (c) 2020 ALM Media Properties, LLC. All rights reserved.

By: Francis G.X. Pileggi and Chauna A. Abner

This is the 15th year that Francis Pileggi and various co-authors have created an annual list of important corporate and commercial decisions of the Delaware Supreme Court and the Delaware Court of Chancery. This list does not attempt to include all important decisions of those two courts that were rendered in 2019. Instead, this list highlights notable decisions that should be of widespread interest to those who work in the corporate and commercial litigation field or who follow the latest developments in this area of Delaware law. Prior annual reviews are available at this hyperlink.

This list focuses, with some exceptions, on the unsung heroes among the many decisions that have not already been widely discussed by the mainstream press or legal trade publications. Links are also provided below to the actual court decisions and longer summaries.

DELAWARE SUPREME COURT DECISIONS

Company Required to Produce Emails Among Management to Stockholders

The Delaware Supreme Court recently issued an opinion that clarifies the duty of a company to produce emails among its management in a Section 220 case. In KT4 Partners LLC v. Palantir Technologies, Inc., Del. Supr., No. 281, 2018 (Jan. 29, 2019), Delaware’s high court addressed a demand under Delaware General Corporation Law (DGCL) Section 220 by a stockholder for corporate books and records, including emails and electronically-stored information (ESI) among management, to allow the stockholder to investigate possible wrongdoing, such as the reasons behind amendments to an Investors’ Rights Agreement that severely reduced the original rights granted under that agreement. This opinion quoted from a law review article co-authored by Francis Pileggi on the intersection of DGCL Section 220 and ESI.

https://www.delawarelitigation.com/2019/01/articles/delaware-supreme-court-updates/company-required-to-produce-emails-among-management-to-stockholders/

Supreme Court Explains the Implied Covenant of Good Faith and Fair Dealing

A recent Delaware Supreme Court decision is must-reading for those who need to know the latest iteration of Delaware law on the implied covenant of good faith and fair dealing. In Oxbow Carbon & Minerals Holdings, Inc. v. Crestview-Oxbow Acquisition, LLC, Del. Supr. No. 536, 2018 (Jan. 17, 2019), Delaware’s High Court provided the latest articulation of Delaware law on the multi-faceted doctrine of the implied covenant of good faith and fairing dealing. In connection with affirming in part and reversing in part a 176-page trial court opinion, which was highlighted on these pages, the Supreme Court agreed with the analysis of the trial court’s correct reading of the plain meaning of the LLC agreement at issue, but disagreed with the application by the trial court of the implied covenant.

 https://www.delawarelitigation.com/2019/01/articles/delaware-supreme-court-updates/supreme-court-explains-the-implied-covenant-of-good-faith-and-fair-dealing/

Delaware Supreme Court Clarifies Ab Initio Requirement for BJR Review

The Delaware Supreme Court recently clarified the “ab initio” requirement announced in Kahn v. M&F Worldwide Corp. case as part of the set of standards that would allow for the BJR standard to apply to a challenged merger. See Olenik v. Lodzinski, No. 392, 2018 (Del. Supr., rev. April 11, 2019).  The High Court determined that the requirement was not satisfied based on the facts of the instant case because the “economic bargaining took place prior to the date” when the protections announced in the Kahn v. M&F Worldwide Corp. case needed to be in place.

Much commentary has already been written about this case, so a lengthy summary is not provided here, but I refer to prior decisions that have applied the ab initio requirement, for background purposes, as noted on these pages.

 https://www.delawarelitigation.com/2019/04/articles/delaware-supreme-court-updates/delaware-supreme-court-clarifies-ab-initio-requirement-for-bjr-review/

Delaware Supreme Court Clarifies Appraisal Law

The Delaware Supreme Court, in a per curiam decision, recently determined that “deal price less synergies” was the appropriate determination of fair value in the appraisal action before it.  In Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., C.A. No. 11448-VCL (Del. Apr. 16, 2019), the Court reversed the Court of Chancery’s holding that “unaffected market price” was the fair value on the date of the merger. This case is the third in a recent trilogy of precedent-setting Delaware appraisal cases, preceded by DFC Global Corp. v. Muirfield Value Partners, L.P., 172 A.3d 346 (Del. 2017) and Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd, 177 A.3d 1 (Del. 2017).  This case has been the subject of extensive commentary by scholars and practitioners.

https://www.delawarelitigation.com/2019/04/articles/delaware-supreme-court-updates/delaware-supreme-court-clarifies-appraisal-law/

Delaware Supreme Court Addresses Independence of Directors

In Marchand v. Barnhil, CA. No. 2017-0586-JRS (Del. Ch. June 18, 2019), the Delaware Supreme Court addressed the meaning of the words “independence” and “disinterestedness” in the context of adequately pleading pre-suit demand futility as a prerequisite for pursuing a derivative claim against corporate directors. The court reversed the Court of Chancery’s dismissal of the case for failure to establish demand futility. This issue is one of the most nuanced and challenging in Delaware corporate litigation as indicated by the disagreement on the outcome among the experienced jurists deciding this case.

https://www.delawarelitigation.com/2019/06/articles/delaware-supreme-court-updates/delaware-supreme-court-addresses-independence-of-directors/

Delaware Supreme Court Instructs on Standards of Deposition Conduct

A recent Delaware Supreme Court opinion provides a tutorial on the standards imposed on Delaware lawyers when a deponent, who is the lawyer’s client, engages in inappropriate conduct during a deposition. In Shorenstein Hays-Nederland Theaters LLC Appeals, Nos. 596, 2018 and 620-2018 (Del. June 20, 2019), Delaware’s High Court issued its first decision on this specific issue, as compared to the rather abundant guidance that has existed for many years regarding the consequences when lawyers themselves engage in errant conduct during a deposition.

https://www.delawarelitigation.com/2019/09/articles/delaware-supreme-court-updates/delaware-supreme-court-instructs-on-standards-of-deposition-conduct/

Confidentiality Agreement Not Always Required for Section 220 Demands

For the first time, the Delaware Supreme Court decided that in a lawsuit in which a stockholder demands corporate books and records pursuant to Section 220 of the Delaware General Corporation Law, although it is typical to condition the production of records on entering into a confidentiality agreement, that the statute does not strictly require such a condition for production. The court also explained in Tiger v. Boast Apparel, Inc., No. 23, 2019 (Del. Aug. 7, 2019), that a party need not show exigent circumstances for a court to grant something less than indefinite confidentiality, and the inspection of records pursuant to Section 220 is not subject to a presumption of confidentiality.

https://www.delawarelitigation.com/2019/08/articles/delaware-supreme-court-updates/confidentiality-agreement-not-always-required-for-section-220-demands/

COURT OF CHANCERY DECISIONS

Chancery Clarifies Director’s Right to Corporate Records

A recent Delaware Court of Chancery decision addressed the important issue of the right of directors to be given access to corporate records. In Schnatter v. Papa John’s International, Inc., C.A. No. 2018-0542-AGB (Del. Ch. Jan. 15, 2019), Delaware’s court of equity considered a claim under Section 220(d) of the Delaware General Corporation Law (DGCL) by the founder and largest stockholder of the Papa John’s pizza chain who was forced out as the CEO but retained his position as a director.  He sought to obtain books and records in his capacity as a director to support an investigation that the other directors breached their fiduciary duties by improperly ousting him for unjustified reasons.

https://www.delawarelitigation.com/2019/01/articles/chancery-court-updates/chancery-clarifies-directors-right-to-corporate-records/

Chancery Finds Usurpation of Corporate Opportunity

Delaware case law is well-established regarding the aspect of the fiduciary duty of loyalty that prohibits a corporate director from usurping a corporate opportunity. A recent decision from the Delaware Court of Chancery applies that well-settled prohibition in a flexible manner to a set of facts that have apparently not been squarely addressed in prior precedent.  In Personal Touch Holding Corp. v. Glaubach, C.A. No. 11199-CB (Del. Ch. Feb. 25, 2019), the court awarded damages for the breach of this subset of fiduciary duty, as well as for other breaches of fiduciary duty.

https://www.delawarelitigation.com/2019/03/articles/chancery-court-updates/chancery-finds-usurpation-of-corporate-opportunity/

Chancery Applies Corporate Advancement Case Law to LLC Context

A recent Delaware Court of Chancery decision interpreted the advancement provisions of an LLC Agreement by applying case law interpreting DGCL Section 145 in the corporate context.  In Freeman Family LLC v. Park Avenue Landing LLC, C.A. No. 2018-0683-TMR (Del. Ch. Apr. 30, 2019), the court reviewed the applicability of “defined phrases” that are familiar prerequisites for advancement in the corporate context pursuant to DGCL Section 145, and analyzed that same language that was used in an LLC agreement provision granting advancement.

https://www.delawarelitigation.com/2019/05/articles/chancery-court-updates/chancery-applies-corporate-advancement-case-law-to-llc-context/

Chancery Instructs on DGCL Merger Requirements

A recent Delaware Court of Chancery opinion began by describing the complaint as reading like a law school exam designed to test the knowledge of a student regarding the requirements in the DGCL that must be satisfied in connection with a merger, and the court commented that the company would not have done well on the exam.

In Mehta v. Mobile Posse, Inc., C.A. No. 2018-0355-KSJM (Del. Ch. May 8, 2019), the court identified the six primary issues in this case as follows:

(1) Whether DGCL Section 262 was not complied with in connection with the failure to notify stockholders of their appraisal rights within the required timeframe;

(2) Whether DGCL Section 228 was not complied with due to the failure to send prompt notice of the written stockholder consents;

(3) Whether the merger agreement, or documents it incorporates, failed to comply with DGCL Section 251 by not including the amount of cash the preferred stockholders would receive for their shares;

(4) Whether the stockholder consents did not enjoy the ratifying effect under DGCL Section 144;

(5)  Whether the director defendants breached their fiduciary duty of disclosure; and

(6) Whether the director defendants breached the fiduciary duty of loyalty because the merger was a self-dealing transaction and not entirely fair.  With one small exception, the court found that the statutory violations were sufficiently established at the early procedural stage of a motion for judgment on the pleadings.

https://www.delawarelitigation.com/2019/05/articles/chancery-court-updates/chancery-instructs-on-dgcl-merger-requirements/

Chancery Grants Advancement on Counterclaims

A recent decision of the Delaware Court of Chancery clarifies those instances where a defensive counterclaim against a former officer and director may be covered by advancement rights. In a bench ruling in Dodelson v. AC Hold Co., Inc., C.A. No. 2019-009-SG (Transcript) (Del. Ch. May 21, 2019), the court interpreted the charter provision that included within the coverage for “indemnified parties” both former directors and officers. Notably, bench rulings may be cited as authority in briefs before the Delaware Court of Chancery.

https://www.delawarelitigation.com/2019/06/articles/chancery-court-updates/chancery-grants-advancement-on-counterclaims/

Chancery Orders Mandatory Indemnification per DGCL Section 145(c)

The recent Delaware Court of Chancery decision in Brown v. Rite Aid Corporation, C.A. No. 2017-0480-MTZ (Del. Ch. May 24, 2019), clarified the perennial issue of how the word “success” is defined for purposes of mandatory indemnification under Section 145(c) of the Delaware General Corporation Law–even if all of the arguments in the underlying litigation were not successful.

https://www.delawarelitigation.com/2019/06/articles/chancery-court-updates/chancery-orders-mandatory-indemnification-per-dgcl-section-145c/

Chancery Determines Valid LLC Managers; Rejects Bump-Out Theory of Board Replacements

The Delaware Court of Chancery left no doubt in a recent ruling that the “bump-out theory” of replacing LLC managers is not recognized in Delaware. In Llamas v. Titus, C.A. No. 2018-0516-JTL (Del. Ch. June 18, 2019), the court explained that incumbent managers need to be removed before their replacements can validly “take their seats.” The court interpreted the counterpart to DGCL Section 225, which is Section 18-110(a) of the Delaware LLC Act.

https://www.delawarelitigation.com/2019/07/articles/chancery-court-updates/chancery-determines-valid-llc-managers-rejects-bump-out-theory-of-board-replacements/

Advancement Granted for Post-Termination Use of Confidential Information

A recent Delaware Court of Chancery opinion in Ephrat v. medCPU, Inc., C.A. No. 2018-0052-MTZ (Del. Ch. June 26, 2019), will remain a noteworthy decision for two reasons: (1) It provides and anthology of prior Delaware decisions granting advancement to former directors or officers that defend claims regarding the use of confidential information acquired in a prior corporate capacity; and (2) It adds nuance to the existing abundant case law interpreting the threshold phrase “by reason of the fact,” which is one of the statutory prerequisites that must be satisfied for advancement claims to prevail pursuant to DGCL Section 145.

https://www.delawarelitigation.com/2019/07/articles/chancery-court-updates/advancement-granted-for-post-termination-use-of-confidential-information/

Chancery Addresses Personal Jurisdiction Over Co-Conspirator

In Clark v. Davenport, C.A. No. 2017-0839-JTL (Del. Ch. July 18, 2019), the court provided a noteworthy explanation of the important nuances that need to be understood when personal jurisdiction is contested, and this opinion provides an excellent analysis of the requirements for opposing personal jurisdiction based on the Delaware Long Arm Statute.

https://www.delawarelitigation.com/2019/08/articles/chancery-court-updates/chancery-addresses-personal-jurisdiction-over-co-conspirator/

Fully-Executed Contract Ruled Unenforceable

In Kotler v. Shipman Associates, LLC, C.A. No. 2017-0457-JRS (Del. Ch. Aug. 21, 2019), the Delaware Court of Chancery issued an opinion that should be read by all lawyers who seek to avoid the risk of a fully-executed contract being ruled unenforceable due to a court later finding, perhaps surprisingly, that the agreement did not accurately express the understanding of the parties.

https://www.delawarelitigation.com/2019/08/articles/chancery-court-updates/fully-executed-contract-ruled-unenforceable/

Chancery Explains Step-Transaction Doctrine and Defines “Affiliate”

An important concept known as the step-transaction doctrine, which treats the agreements in a series of formally separate but related transactions involving the transfer of property as a single transaction if all the steps are substantially linked, was explained in the recent Delaware Court of Chancery opinion in PWP Xerion Holdings III LLC v. Redleaf Resources, Inc., C.A. No. 2017-0235-JTL (Del. Ch. Oct. 23, 2019) and should be consulted by anyone who needs to understand the components of this important doctrine.

https://www.delawarelitigation.com/2019/10/articles/chancery-court-updates/chancery-explains-step-transaction-doctrine-and-defines-affiliate/

Delaware Forum Selection Clause Controls Over Foreign Exclusive Jurisdiction Statute

The recent Delaware Court of Chancery decision in AlixPartners, LP v. Mori, No. 2019-0392-KSJM (Del. Ch. Nov. 26, 2019) rejected an effort to dismiss a Delaware action notwithstanding the provision in an agreement that provided for a forum in a foreign country, and the apparent law of that foreign country that also supported exclusive jurisdiction in that country.

https://www.delawarelitigation.com/2019/12/articles/chancery-court-updates/delaware-forum-selection-clause-controls-over-foreign-exclusive-jurisdiction-statute/

A recent Delaware Court of Chancery opinion provides a reminder of the limited jurisdiction of Delaware’s court of equity and why not all suits for declaratory judgment satisfy the narrow subject matter jurisdiction of the Court of Chancery.  See Takeda Pharmaceuticals U.S.A., Inc. v. Genentech, Inc., C.A. No. 2018-0384-MTZ (Del. Ch. Mar. 26, 2019).

Background:

This case involved an effort to obtain a declaratory judgment that would validate a defense in patent litigation pending in another forum based on a patent license.  The court held that because there was an adequate remedy at law, the court did not have equitable subject matter jurisdiction for a declaratory judgment in this case, and no anti-suit injunction was available either.

Key Takeaways:

  • The court explained that in order for it to entertain a declaratory judgment action, there must be an “actual controversy.”  See footnotes 46 to 47 and accompanying text.  Although the four elements that the court reviews in order to determine whether there is an “actual controversy” were satisfied in this case, the court dismissed the suit without prejudice because it determined that the necessary equitable jurisdiction for making a ruling on a declaratory judgment claim was lacking. 
  • The court provided its reasoning about why an adequate remedy at law deprived it of equitable jurisdiction.  See footnotes 52 to 68 and accompanying text.  The adequate remedy at law in this case was that the license defense was capable of being presented in pending litigation in another forum, and therefore an anti-suit injunction was not available based on the absence of the irreparable harm requirement.
  • Importantly, the Court of Chancery in the instant opinion distinguished a 2013 Delaware Supreme Court decision in National Industries Group v. Carlyle Investment Management, highlighted on these pages, as inapplicable in this matter.  The Court of Chancery distinguished the facts in that case which involved the grant of specific performance to enforce a forum selection clause and to enjoin suits pending in another jurisdiction contrary to the forum selection clause.  The difference between that decision and similar decisions highlighted on these pages involving the enforcement of a forum selection clause, distinguished in this decision, was that it has been well-established in Delaware that forcing someone to litigate in another forum contrary to a forum selection clause satisfies the irreparable harm prerequisite for injunctive relief–a prerequisite not satisfied in this case.
  • In this case, there was no contractual forum selection clause involved, and the request that the Court of Chancery validate a defense to be used in court in another jurisdiction failed to acknowledge that courts often apply the law of jurisdictions other than where the court is sitting.

See generally, the three traditional “buckets” that a case must “fit into” in order to trigger equitable jurisdiction, described at footnotes 42 through 45 and accompanying text.

The Delaware Court of Chancery recently issued an epic decision that serves as a mini-treatise on several topics of importance to corporate and commercial litigators including: (1) interpretation of material adverse change clauses or material adverse effect clauses in merger agreements; and (2) the meaning and application of the phrase “commercially reasonable efforts” or “reasonable best efforts” often found in merger agreements.

The opinion in Akorn, Inc. v. Fresenius Kabi AG, C.A. No. 2018-0300-JTL (Del. Ch. Oct. 1, 2018), will be firmly ensconced in the pantheon of the most notable decisions of Delaware courts and could easily be the subject of a full-length law review article.  But for purposes of a blog post that merely attempts to highlight the key issues addressed by the court, so that interested readers might review the entire opinion if relevant to their practice, I will focus on several key aspects of the decision only.

The Delaware Supreme Court affirmed this decision, as noted on these pages.

Procedural Background:

The procedural context in which this decision was written, was expedited proceedings in which two parties to a merger agreement sought competing rulings on the meaning of the agreement. On the one hand, the seller argued that the merger agreement should be specifically enforced.  The buyer, however, filed a counterclaim that sought a ruling that it properly terminated the merger agreement based in part on the occurrence of a material adverse effect or a material adverse change, as defined in the agreement.  The purchaser prevailed in its argument that it properly terminated the agreement.

Notably, a 5-day trial was held with nearly 2,000 exhibits. A total of 16 witnesses testified, and 54 depositions were lodged.  The trial was held less than 3 months after the complaint was filed.  This 246-page opinion was issued less than one week after the final post-trial briefs and oral argument were completed.

Factual Background:

The detailed facts on which the court’s reasoning and conclusion are based are described in the first 110 pages of this decision. It would be a challenge to do the facts justice in a brief overview, but for purposes of providing the highlights of the legal principles in the case, suffice it to say that the court provided exhaustive detail about each of the factual aspects of the parties’ dispute and why one party sought to enforce the merger agreement and one party successfully argued that it was justified in terminating the merger agreement prior to closing.

Highlights of Legal Principles and Analysis by the Court:

       Material Adverse Change Clauses:

  • In a comprehensive and scholarly analysis, the court surveys the law on Material Adverse Change (“MAC”) provisions or Material Adverse Effect (“MAE”) provisions in merger agreements, including prior cases that discuss them and copious footnotes are provided with reference to specific percentages, for example, that are necessary in determining whether a MAC clause or a MAE clause should be triggered. See pages 117 to 204. The court refers to a MAC clause and a MAE clause as synonymous.
  • This decision is thought to be the first Delaware opinion upholding the termination of a merger agreement due to the occurrence of a MAC/MAE.

       Key Treatise Cited:

  • Notable is the court’s reference in footnote 558 to the many Delaware decisions that cite to the Kling and Nugent treatise on M&A agreements and M&A practice as an authoritative source for issues relating to merger agreements, such as MAC/MAE clauses and post-closing indemnification provisions.

       Is Delaware Pro-Sandbagging—or Not?

  • Importantly, the court discusses whether Delaware should be considered a “pro-sandbagging” state as it relates to the enforcement of representations in contracts when one party might know prior to closing that the adverse party’s representations are not accurate. See footnote 756 to 767 and accompanying text. But cf. Eagle Force Holdings LLC v. Campbell, in which the Delaware Supreme Court declined to affirmatively decide the issue, but questioned whether Delaware was a pro-sandbagging state. 187 A.3d 1209, 1236, n. 185 (Del. 2018); id. at 1247 (Strine, C. J. & Vaughn, J., concurring in part, dissenting in part). This case was previously highlighted on these pages.
  • Also noteworthy is a robust explanation, with citations to many authorities, that describe the factors that must be considered to determine when the breach of a contract is material. See pages 208 to 211.

       Commercially Reasonable Efforts and Reasonable Best Efforts:

  • In what may be the most comprehensive analysis in a Delaware decision of the meaning of the phrase “commercially reasonable efforts” and similar phrases such as “reasonable best efforts,” the court discussed the meaning of these contractual standards and their variations, as well as how they should be interpreted and applied. See pages 212 to 220.
  • The court compares the differences, if any, between these similar standards, with citations to treatises, cases and articles that discuss them. See pages 213 and 214, as well as footnotes 788 to 800.
  • See generally Professor Bainbridge’s analysis of this topic with citations to many authorities. (The corporate law scholarship of Professor Stephen Bainbridge is often cited by Delaware courts.)  See also several Delaware decisions highlighted on these pages that also discuss the topic.
  • In its analysis of this topic, the Court of Chancery cites to the Delaware Supreme Court opinion in Williams Companies v. Energy Transfer Equity, L.P., highlighted on these pages. The Delaware high court explained in that decision that it: “did not distinguish between” the two phrases, “commercially reasonable efforts,” and “reasonable best efforts,” but rather the court described those phrases as both imposing “obligations to take all reasonable steps to solve problems and consummate the transaction.” (quoting Williams, 159 A.3d at 272). See also footnote 808, and accompanying text.

Delaware_State_CapitolLegislation is being proposed to ask the Delaware Legislature to limit the ability of corporations to adopt fee-shifting provisions in their charter and bylaws, but to provide additional support for adopting forum selection clauses in those same corporate documents. The proposed legislation is available at this link. A memo describing the policy analysis on which the proposal is based has also been provided by a cross section of Delaware lawyers representing the major constituencies involved, such as shareholders, directors and corporations. Also available is a FAQ with answers to the most likely questions about the proposed bill. (Slight modifications to the proposed legislation were made after this post was published, and I would expect other amendments to be made prior to its final passage.)

Most readers are aware that the Corporation Law Section of the Delaware State Bar Association annually proposes amendments to the Delaware General Corporation Law for the Delaware Legislature to pass, in order to refine the DGCL on a regular basis and to make sure it adapts to changes in the marketplace. My first hand experience is that those “routine” amendments are often passed by the Delaware Legislature “routinely”. This is so because the process works well and has a long track record of benefitting the state. If the proposals for amendments to the DGCL ever backfired on the legislators–as a political matter, not necessarily a legal matter, then the next proposed bill to amend the DGCL would not pass as easily the following year. That risk, however, has not come to pass for many decades, if ever.

The proposed legislation provides that if a charter or bylaw includes a forum selection clause for stockholder disputes, Delaware must be one forum that is selected. If another state is selected as a forum, Delaware must be included as an additional optional forum. Thus, a state other than Delaware cannot be selected as the exclusive forum. This would be a legislative reversal of the First Citizens decision recently decided in Chancery. The legislation does not directly address the validity of forum selection clauses that choose states other than Delaware, but the proposed DGCL amendment does not ban a permissive forum outside of Delaware as long as Delaware is also included as a permissive forum.

The proposed legislation about fee-shifting clauses and forum selection provisions in corporate charters or bylaws may be sui generis in some ways. Most amendments to the DGCL that are presented to the Delaware Legislature are not controversial and pass without debate. This one is different. The proposed legislation linked above is, in part, a result of the ATP case, styled as ATP Tour, Inc. v. Deutscher Tennis Bund, Del. Supr., No. 534, 2013 (May 8, 2014), highlighted here on these pages, in which the Delaware Supreme Court upheld the facial validity of fee-shifting bylaws for a non-stock corporation. Many legal commentators read that decision to apply to stock corporations as well. Not everyone agreed.

Last year, before the June 30 close of the legislature’s term, legislation was proposed to prohibit stock corporations from adopting fee-shifting bylaws. The DuPont Company and other large companies as well as the U.S. Chamber of Commerce opposed the legislation that was proposed last year to limit fee-shifting bylaws. Institutional investors and shareholder-rights groups supported the proposal. Law professors lined up on both sides of the debate. In light of the short amount of time available last year before the close of the legislative session, and the strong lobbies on both sides of the issue, the legislature deferred consideration until the 2015 legislative session.

Unlike routine amendments to the DGCL, this proposed legislation confronts powerful lobbyists on both sides of the issue. Thus, this proposal may be more akin to typical legislation in which the final version of the bill that is passed is not always similar to the first version of the bill that was introduced. The only certainty about this proposed bill, is that it will generate an enormous amount of commentary and discussion. I would not expect a final outcome until the last day of the session on June 30.

If some legislation is passed that ultimately limits the ability of a corporation to adopt fee-shifting bylaws, an interesting issue will be the impact, if any, that the legislation will have on those companies that already adopted fee-shifting provisions. Generally, there is a prohibition against ex post facto laws. Stay tuned.

SUPPLEMENT: Professor Stephen Bainbridge, one of the nation’s foremost corporate law scholars, has written three commentaries already within the one business day since this proposal surfaced, including links to his prolific scholarship on the topic of fee-shifting and forum selection provisions in corporate organic documents. Each of the following titles is hyperlinked to his corresponding post: An Open Letter to the Delaware Legislature on Fee-Shifting Bylaws; Open Letter to the Delaware Legislature on Forum Selection Bylaws; Delaware Legislative Proposals on Fee-Shifting and Forum Selection Bylaws.

SUPPLEMENT II: Professor Larry Hamermesh, Director of the Institute of Delaware Corporate and Business Law, provides scholarly and insightful analysis on the issue of the potential retroactive impact of the proposed legislation on existing fee-shifting bylaws. If the proposed legislation is passed, this may be one of the first issues litigated.

Justice Henry duPont Ridgely of the Delaware Supreme Court recently authored an article on one of the most timely issues in corporate litigation today: bylaw amendments that include fee-shifting and forum selection clauses.

His Honor prepared the article based on a speech he presented last month at the SMU Corporate Counsel Symposium, and we are grateful that he has allowed us to share a link to his article. In addition, it remains important to add that the SMU Law Review also consented to this posting of Justice Ridgely’s article with the following acknowledgement about the article: Posted with permission from the SMU Law Review and the Southern Methodist University Dedman School of Law. The article will appear in an upcoming issue of the SMU Law Review. The formal title of the article is: “The Evolving Role of Bylaws in Corporate Governance.”

Much has been written in trade publications and in the blogosphere about recent developments involving bylaw amendments, some of which we have linked to on these pages.

Justice Ridgely announced a few days ago that, after 30 years as a member of the Delaware Judiciary, he will be retiring from the bench in January 2015. He has been one of the brightest stars in the constellation of Delaware jurists, which counts many shining lights among its number. Still, the Delaware Bench will be less stellar in his absence. His public service through his exemplary contributions to the administration of justice will remain a standard by which others should be measured.

My article entitled: Directors Given More Authority to Limit Multi-Forum Litigation, appeared in the November/December issue of NACD Directorship, a publication of the National Association of Corporate Directors. This regular short column discusses the recent Court of Chancery decision in City of Providence v. First Citizens Bancshares, Inc., also highlighted on these pages, which addresses one of the leading issues in Delaware corporate litigation today: forum selection bylaws.

ATP Tour, Inc. v. Deutscher Tennis Bund, Del. Supr., No. 534, 2013 (May 8, 2014).

Momentous Issue Addressed:  The Delaware Supreme Court decided certified questions of law from the District of Delaware regarding whether it was consistent with Delaware law for a bylaw provision to provide for shifting attorneys’ fees to an unsuccessful plaintiff pursuing intra-corporate litigation. Short Answer: Such a bylaw provision is generally enforceable.

Potential Widespread Impact: This opinion may embolden directors to make this fee-shifting provision a common feature of corporate bylaws of Delaware companies. It may also be the “magic bullet” that addresses the scourge of shareholder litigation (as seen from the directors’ viewpoint), to the extent it may discourage “less meritorious” intra-corporate litigation. Conceptually, this opinion should be compared to the Chancery decision on forum-selection bylaw provisions, which the Supreme Court never reviewed because the appeal was voluntarily withdrawn.

Brief Overview: The plaintiff in this case is a Delaware non-stock membership corporation that operates a global professional men’s tennis tour.  Its members include professional tennis players and entities that operate professional tennis tournaments.

The bylaws, to which members agreed to be bound, were allowed to be amended from time to time and include a provision that requires members who unsuccessfully sue the corporation to pay reasonable attorneys’ fees incurred in that litigation.  Several of the members sued the corporation and its board in the United States District Court for the District of Delaware alleging both federal antitrust claims and Delaware fiduciary duty claims.  Upon remand from the United States Court of Appeals for the Third Circuit, the District Court was instructed to address the Delaware state law issues regarding the enforceability of the bylaw provision of the non-stock corporation.  The District Court certified those questions to the Delaware Supreme Court.

The Delaware Supreme Court observed that DGCL Sections 114 and 109(b) provide that the provisions of the DGCL apply to non-stock corporations and all references to the stockholders of a corporation are deemed to apply to members of a non-stock corporation.

Other general principles that have broad application and should be of interest to most corporate and commercial litigators include the following:

  • Bylaws of a corporation are presumed to be valid.  In order to be facially valid, the bylaw must be authorized by the DGCL, be consistent with the Certificate of Incorporation, and must not be otherwise prohibited.  See footnotes 12 to 14.
  • Delaware law allows parties to modify the American Rule by contract to obligate the losing party to pay the attorneys’ fees of the prevailing party.  Corporate bylaws are treated as contracts among shareholders and, therefore, the fee-shifting bylaw is facially valid under Delaware law.  See footnotes 17 through 19.  It is not necessary for the corporate charter to specifically or implicitly authorize such a provision.
  • Whether or not a particular bylaw is enforceable, however, must be based on the facts and circumstances in a particular matter.  For example, the Court referred to several cases where amendments to bylaws were deemed unenforceable based on the principle, well-established in Delaware law, that “inequitable action does not become permissible simply because it is legally possible.”  See footnotes 20 through 27.  For example, when a bylaw amendment changed the date of the annual stockholders’ meeting to a month earlier than the date originally scheduled for the purpose of entrenching the incumbent board and obstructing efforts of dissident stockholders to undertake a proxy contest against management, the Delaware Supreme Court found that bylaw amendment to be unenforceable.  See Schnell v. Chris-Craft Industries, 285 A.2d 437, 439 (Del. 1971).
  • Finally, the Court found that members joining before the bylaw provision was adopted are still subject to its provisions.  The DGCL allows a board to amend or repeal bylaws through its directors and if such an amendment is made, the stockholders will be bound by those bylaw amendments adopted unilaterally by the board.  See footnote 38.

Supplement: Frank Reynolds of Thomson Reuters provides an insightful overview of the case.

Updates: Tom Hals provides an update as of July 7 with a list of companies that have adopted fee-shifting bylaws. Also, Holly Gregory of Sidley Austin provides developments on this topic here. A legislative response by Delaware legislators to this opinion by the Delaware Supreme Court has been tabled until the 2015 session of the Delaware General Assembly.

We previously highlighted the Court of Chancery decision that upheld a forum selection provision in corporate bylaws that required certain suits involving the internal affairs of the corporation to be filed in Delaware. Boilermakers Local 154 Retirement Fund v. Chevron Corporation, C.A. No. 7220-CS (Del. Ch. June 25, 2013).
Professor Larry Hamermesh writes about the voluntary dismissal yesterday of the appeal of that decision by the plaintiffs, and likely ramifications of that dismissal regarding this important issue.

UPDATE: The good professor provides an update on his commentary.

RWI Acquisition LLC v. Todd, C.A. No. 6902-VCP (Del. Ch. May 30, 2012).

Issues Addressed

(1) Whether the Court of Chancery had personal jurisdiction over the member of a Delaware LLC; and (2) Whether the Court could or should stay the first-filed Delaware action, sua sponte, in favor of a later-filed related proceeding in New Mexico.

Short Answer

The Court determined that it would stay the Delaware action sua sponte in the interest of “judicial economy, efficiency, and comity,” and the Court also held that Delaware was an improper forum to determine what interest, if any, a non-resident member had in the Delaware LLC.

Background

This case began as a declaratory judgment pursuant to Section 18-111 of the Delaware LLC Act to determine the duties, obligations and liabilities, if any, of a Delaware limited liability company to one of its initial members.  The one-count complaint sought a judicial declaration that the individual defendant, a resident of New Mexico, was no longer a member of the Delaware LLC and did not have any equity or other interests in the Delaware LLC.

The individual defendant, named Todd, filed a motion to dismiss under Court of Chancery Rules 12(b)(2) for lack of personal jurisdiction and 12(b)(3) for improper venue.

The Court concluded that the forum selection clause in the employment agreement of Todd, which paralleled a similar provision in a related stock purchase agreement, precluded the Court from determining what effect, if any, Todd’s termination from a related entity had on his rights in the Delaware LLC.  In addition, the Court determined that it did not have the ability to definitively decide whether Todd continued to hold any interest in the Delaware LLC until a Court in New Mexico determined other related rights.  Thus, on its own initiative the Court stayed this action as a matter of judicial efficiency, and in deference to the apparent intent of the contracting parties to prefer proceedings subsequently filed in New Mexico.

RWI Acquisition LLC (“RWI Del.”) sought a judicial declaration that Todd was no longer a member of RWI Del.  Todd is a New Mexico resident whose only connection with the State of Delaware apparently is his involvement with RWI Del.  RWI Del. was formed in 2007 as the vehicle to effect a substantial investment in a New Mexico corporation that Todd founded in 1974, referred to as RWI – N.M.  The complaint alleges that upon the termination of his employment with RWI – N.M., Todd forfeited his membership interest in RWI Del.  In connection with the investment transaction in 2007, the following agreements were entered into:  (1) The operating agreement of RWI Del.; (2) The stock purchase agreement (“SPA”) memorializing RWI Del.’s purchase of the stock Todd owned in RWI – N.M.  (The SPA had a forum selection clause providing that New Mexico is the “sole and exclusive” forum for any disputes); (3) The subscription agreement by which Todd received units in RWI Del.; (4) A Members’ Agreement which restricted the transfer of units in RWI Del.; (5) The employment agreement between RWI – N.M. and Todd which contained a forum selection clause in favor of the state and federal courts in New Mexico.  These agreements had overlapping references.

In connection with the attempt to terminate Todd for cause, the issue arose about whether or not the new majority owner could exercise its right to purchase the interests of Todd in RWI Del. for a purchase price of “zero,” allegedly based on the terms of one of the parties’ agreements.

Todd’s motion to dismiss was based on the argument that he did not “transact any business in the state” within the meaning of the long-arm statute in Delaware at Section 3104(c) of Title 10 of the Delaware Code, and even if he had, he lacks the minimum contacts necessary for constitutional muster.  He also claimed that he was not a manager and therefore the implied consent provisions of Section 18-109(a) did not apply.

In response, the plaintiff asserts that by co-forming a Delaware LLC, he was transacting business in the state, and that the implied consent statute is sufficient to confer personal jurisdiction because it involves the “business” of the LLC for purposes of Section 18-109(a).

Analysis

The Court began its analysis by relying on the maxim that Delaware courts “afford great weight to a plaintiff’s choice of forum.  Only extraordinary circumstances can supersede a plaintiff’s right to select its choice of forum.”  See footnote 28.  One notable exception to this rule is the routine deference that Delaware courts give to forum selection clauses.  The Court recognized prior case law that defers to a forum selection clause where the parties use express language that excludes all other courts before which the parties can bring an action, and such a forum selection would support a motion to dismiss under Court of Chancery Rule 12(b)(3).  See Ashall Homes Ltd. v. ROK Entm’t Gp. Inc., 992 A.2d 1239, 1245 (Del. Ch. 2010).  The Ashall case was highlighted on this blog here.

The Court determined that in order to decide the interests of Todd in the Delaware LLC, it would first need to decide, among other things, the rights that Todd had under his employment agreement.  The employment agreement, however, provides that any lawsuit related to that agreement may only be brought in the state or federal courts within the state of New Mexico.  The Court reasoned that it would be contrary to the intent of the parties for the Court of Chancery to resolve issues contrary to that forum selection clause.  Therefore, based on the fact that Delaware is not a proper venue for determining the relevant issues, the Court granted the motion to dismiss on that basis.  See footnotes 49 and 50 and accompanying text.

Decision of Court to Stay Delaware Case Sua Sponte

The Court considered whether it could bifurcate the issues that needed to be decided by a court in New Mexico with issues that were not subject to the forum selection clause.  The Court of Chancery observed that a second-filed action is pending in New Mexico with competent jurisdiction to hear all of the parties’ disputes.

The Court of Chancery therefore raised sua sponte whether the action should be stayed as a matter of judicial efficiency and consistent with the intent of the parties.  See footnote 55.  The Court referred to a prior decision of the Court of Chancery in Ashall Homes in which the Court granted a motion to dismiss for improper venue based on forum selection clauses.  In that case, the Court described the policy reasons for having disputes adjudicated in one court. 

Those policy reasons promoting efficiencies, and avoiding “claims splitting,” animate doctrines such as res judicata and the McWane Doctrine.  The Ashall opinion describes those doctrines as a means to encourage litigants to litigate their disputes in one place and “not force the defendants to unnecessarily expend resources on what would essentially be the same defense in multiple venues.”

Conclusion

The Court in the instant case emphasized that:  the interest of the Court of Chancery “in regulating the internal affairs of Delaware entities does not automatically preclude it from considering obvious inefficiencies and common sense reasons in favor of permitting another competent court to hear an otherwise conventional contract claim.”  In sum, the Court concluded that the first-filed Delaware proceeding should be stayed in the interests of judicial economy, efficiency and comity.

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.