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Exclusive Forum Provisions: A Brand New Item for Corporate Governance and M&A Checklists

 

Exclusive Forum Provisions: A Brand New Item for Corporate Governance and M&A Checklists

Public companies more and more are adopting “exclusive forum” bylaws and charter provisions that need their stockholders to visit specified courts if they would like to make fiduciary duty or any other intra-corporate claims against the organization and it is company directors.

Exclusive forum provisions might help companies react to such lawsuit more proficiently. Following most public M&A bulletins, for instance, stockholders file nearly identical claims in multiple areas, raising the expense needed to reply. Purchasers also believe the discomfort, given that they typically bear the expense and might be named in a few of the proceedings. Exclusive forum provisions help address the elevated costs, while permitting stockholders to create claims within the specified forum.

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However, companies also should consider whether there may be strategic or other advantages in litigating in a
jurisdiction outside their state of incorporation. For example, a company in some circumstances may prefer to
litigate in the state where its headquarters is located, if it perceives a “home court” advantage based on local
goodwill or other advantages. Depending on the kinds of litigation expected and its perception of the relative
strength of such advantage, such a company may prefer not to adopt an exclusive forum bylaw.1
Scope of Litigation. The litigation subject to exclusive forum bylaws generally is limited to claims of breach of
fiduciary duty and other matters relating to the incorporating jurisdiction’s corporate law and other intra-company
disputes.
Increasing Popularity. The number of companies adopting exclusive forum bylaws shows their popularity: In the
first quarter of this year, about 40 public companies incorporated in Delaware adopted exclusive forum bylaws,
and about 75% of Delaware corporations going public had adopted the provisions.
ENFORCING EXCLUSIVE FORUM BYLAWS
The Delaware Perspective
The Delaware chancery court in June 2013 found that exclusive forum provisions, even if not approved by
stockholders, generally should be enforceable.2 The court described a corporation’s bylaws as part of the
“contract” between the stockholders and the corporation. The court noted that stockholders were on notice that
the board, under Delaware’s corporate statute and the company’s certificate of incorporation, could amend the
bylaws without a stockholder vote (as is the case in most public companies), and that stockholders themselves
could take action in response to the bylaws, such as by changing the bylaws to repeal the provision or even
replacing the board of directors.
The court also noted that there might be some equitable limits on the enforcement of such bylaws, saying that
while “in most internal affairs cases [exclusive forum] bylaws will not operate in an unreasonable manner,” the
application of the bylaws might be subject to review in any particular “real-world” situation.
Delaware courts have recognized, though, that the decision actually to enforce an exclusive forum bylaw should
be made initially by courts in other jurisdictions, and have declined to enjoin plaintiffs from proceeding in other
jurisdictions.3 For the provisions to be of practical benefit, then, courts in other jurisdictions have to be willing to
enforce them.
Courts Outside Delaware
Courts in several states that have been asked to consider exclusive forum bylaws that specified another court as
the exclusive forum for a dispute have enforced the bylaws by dismissing the litigation in their courts, leaving the
1 A stockholder brought suit in the Delaware chancery court on June 19, 2014, against a Delaware corporation that, on June 10, the day
before it announced its agreement to merge with another company, adopted an exclusive forum bylaw specifying courts in its headquarters
jurisdiction rather than in Delaware (see Providence v. First Citizens BancShares Inc. et al.). The stockholder claims, among other things,
that the bylaw is invalid because it denies stockholders access to the Delaware courts. However, that case is still pending.
2 Boilermakers Local 154 Ret. Fund v. Chevron Corp. (Del. Ch. June 25, 2013).
3 For an example, see Edgen Group (Del. Ch. Nov. 5, 2013).

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plaintiffs to bring claims in the courts specified in the exclusive forum bylaws. It remains to be seen, though,
whether all courts will recognize the enforceability of these provisions, and whether these and other courts will
place any limits on the enforceability in specific contexts.
California. Last month, a California court enforced an exclusive forum bylaw adopted by Safeway in October
2013.4 Safeway (according to its SEC filings) had received notices from an activist stockholder and had been
approached by Albertsons about a potential acquisition, but had decided not to pursue the sale at that time.
Later, Safeway pursued the sale, and in March 2014 agreed to be sold to Albertsons. Plaintiffs filed multiple
lawsuits in California state and federal courts and in Delaware, alleging breaches of the Safeway directors’
fiduciary duties. Safeway moved to dismiss the litigation in the California state court, pointing to the exclusive
forum bylaw, and the court agreed, noting the “contractual principles” underlying the Delaware court’s analysis of
such provisions in Boilermakers. The court further noted that the plaintiffs had not shown why enforcement of the
provision might be unreasonable in this case, and that the record did not support an argument that the provision
had been adopted after the “wrongdoing” had already occurred.
The decision is all the more significant because it declined to follow a California federal court that three years
previously had refused to enforce an exclusive forum bylaw.5 The Safeway court noted that the earlier case had
been decided before Boilermakers, and had involved allegations of wrongdoing prior to adoption of the bylaw.
Illinois. An Illinois court recently dismissed litigation that had been filed in Illinois against Beam after it agreed to
be acquired by Suntory.6 Beam had adopted an exclusive forum bylaw in December 2013, about a month after
being approached by Suntory, and a month before agreeing to be acquired. The court noted the contractual
rationale of Boilermakers, and that the complaint did not allege that any “wrongdoing” had occurred by the time of
adoption of the bylaw or that the board had adopted the bylaw with a “sinister purpose.”
New York. In November 2013, in one of the first cases relying on Boilermakers, the New York Supreme Court
dismissed all of the derivative claims that had been brought against Aspen University by its stockholder and
former CEO, citing the company’s exclusive forum provision.7 Among other things, the court specifically rejected
the plaintiff’s claim that an exclusive forum bylaw needed to be approved by the company’s stockholders in order
to be binding.
PROXY ADVISOR POSITIONS AND STOCKHOLDER REACTIONS
Proxy advisory services tend to recommend against exclusive forum bylaws that are put to a stockholder vote,
though, as noted below, most stockholders don’t seem to be following their advice.
Both ISS and Glass Lewis state in their 2014 proxy voting guidelines that they make recommendations on how
stockholders should vote on exclusive forum provisions on a case-by-case basis. Both also look for some
showing of harm to the adopting corporation from other litigation and to otherwise good governance at the
4 Groen v. Safeway (May 14, 2014) (Alameda County).
5 See Galaviz v. Berg (N.D. Cal. 2011).
6 Miller v. Beam, Ill. Ch. Div., March 15, 2014.
7 Hemg v. Aspen University (N.Y. Sup. Ct. Nov. 4, 2013).

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adopting company. Moreover, Glass Lewis says in its guidelines that it will recommend that stockholders vote
against an adopting company’s governance committee chair, if during the past year the board approved an
exclusive forum bylaw without stockholder approval.
However, the results of votes on the bylaws that have been put to stockholders and director elections suggest that
the majority of stockholders approve of such provisions:
• ISS recommended against approval by stockholders of 11 exclusive forum provisions that have been put
to stockholders this year (as of early June). Nonetheless, each passed (and one other against which they
recommended is still pending).
• Glass Lewis recommended against reelection of the chairman of SEACOR Holdings’ nominating and
governance committee after the board adopted an exclusive bylaw provision. The director nonetheless
was reelected by a comfortable margin, with only about 5% of the shares voted being voted against his
reelection.
TIMING
Relative to Alleged Wrongdoing. Companies seeking the benefits of exclusive forum bylaws should consider
carefully the timing of their adoption. While courts have enforced such bylaws, several have noted the potential
for additional questions, at least, if the bylaws are adopted after “wrongdoing” that may be the subject of litigation
has occurred or appear to be adopted for an improper purpose.
In the M&A context, then, it may be best, if possible, to adopt such a provision early in the process, or even before
beginning the process, before the board starts making the acquisition-related decisions that are likely to be the
subject of stockholder claims. The California and Illinois courts in the examples noted above both involved
adoption of exclusive forum bylaws after the company was approached by the eventual buyer, but before the
company was committed to the sale and before the board had completed its process. Several companies have
adopted exclusive forum bylaws concurrent with or soon before entering into a sale agreement or around the time
that activists seemed to be taking positions in the stock, but courts have not yet ruled definitively on the
enforceability of the bylaws in those contexts. In any event, it may be better to adopt such a provision at such a
time than not at all.
Effect of Public Announcement. Adoption of an exclusive forum bylaw, as an amendment to the bylaws, must be
announced publicly via an SEC filing. Companies thus should be ready to respond to questions about the
implications of the adoption. Given the number of companies currently adopting the provisions after recent court
decisions, however, such an adoption may be seen as less of a signal than it might have been previously.
CONCLUSION
Exclusive forum provisions are an increasingly popular response to the costs of multi-forum stockholder litigation.
Public companies should consider whether such provisions would be beneficial to them and their stockholders.
Companies that anticipate substantial litigation, such as those contemplating a sale or facing aggressive activist
involvement, may want to implement such provisions sooner rather than later, to minimize the potential
challenges to the provisions based on the timing of any alleged misconduct.

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Contact:
Michael O’Bryan
(415) 268-6352
[email protected]
Kevin Calia
(415) 268-7519
[email protected]
James Beha
(212) 336-4079
[email protected]

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Because of the generality of this update, the information provided herein may not be applicable in all situations
and should not be acted upon without specific legal advice based on particular situations. Prior results do not
guarantee a similar outcome.

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