Exclusive Forum Provisions: A New Item For Corporate Governance And M&A Checklists

Public companies increasingly are adopting "exclusive forum" bylaws and charter provisions that require their stockholders to go to specified courts if they want to make fiduciary duty or other intra-corporate claims against the company and its directors.

Exclusive forum provisions can help companies respond to such litigation more efficiently. Following most public M&A announcements, for example, stockholders file nearly identical claims in multiple jurisdictions, raising the costs required to respond. Buyers also feel the pain, since they typically bear the costs and may even be named in some of the proceedings. Exclusive forum provisions help address the increased costs, while allowing stockholders to bring claims in the specified forum.

The recent surge in adoptions started last year, after the Delaware chancery court confirmed the general enforceability of exclusive forum bylaws for companies incorporated there. Perhaps more importantly, courts outside of Delaware also have been enforcing the provisions and dismissing claims brought outside the specified forums.

Exclusive forum provisions can be implemented by most companies in their bylaws by action of their board of directors, without stockholder approval, though some companies have sought (and generally obtained) stockholder approval. Companies may want to consider adopting these bylaws as part of their general corporate governance regime or when they see events, such as the arrival of activists or a potential M&A process, that portend greater potential for litigation ahead.

BACKGROUND

Response to Expanding Litigation Environment. Exclusive forum bylaws arose in response to the ever-increasing stockholder litigation against public companies. In the M&A context, stockholder litigation now is brought in virtually all public company transactions. Moreover, such litigation is frequently brought in multiple jurisdictions, so that the company has to defend against the same or very similar claims in different courts at the same time, resulting in higher costs (in terms of time as well as money) and exposure to potentially inconsistent rulings.

Exclusive forum bylaws attempt to address the problems associated with fighting similar claims in multiple jurisdictions by requiring potential plaintiffs to bring the claims in one specified court or jurisdiction. The specified courts are almost always in the company's jurisdiction of incorporation, and so for public companies more often than not are in Delaware. By focusing the litigation in such courts, the companies and other parties also get the benefit of having the cases heard by judges who are experienced in applying the law of that jurisdiction, which can enhance speed and predictability. Most exclusive forum provisions also allow the company to permit exceptions, where the board consents to...

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