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The pitfalls of forum selection

Some keys to help avoid redundant litigation

If you could wave your magic wand and eliminate multi-jurisdictional litigation against your company, would you do it? Should you?

The most tiresome type of litigation is redundant litigation. The classic case arises when a public company's board agrees to sell the company. Shareholders who want to challenge the price accepted by their board absolutely must be able to do so—but there's no point in litigating the same question in multiple jurisdictions. Nevertheless, when a public company decides to sell itself, it will face on average more than five suits about this one transaction. It's an unfortunate waste of time and resources. The idea that these plaintiffs need to be able to sue at the local courthouse is hopelessly archaic. The plaintiffs (and their attorneys) bringing these suits are anything but provincial.

There may be a solution for general counsel who want to eliminate duplicative litigation when it comes to a company's internal affairs. In a recent case involving corporate giants Chevron and FedEx, the Delaware Chancery Court ruled that a board of directors is within the bounds of its authority when it inserts a forum selection provision into a company's bylaws (assuming that the board has retained the authority to change the company's bylaws unilaterally). Chevron and FedEx's boards inserted into their bylaws provisions confining shareholders to Delaware state court—and Delaware state court only—when they seek to litigate questions in four categories: derivative suits; fiduciary duty suits; claims under the Delaware General Corporation Law; and other claims regarding internal affairs of the corporation.

Should your company follow Chevron and FedEx's lead? The vast majority of commentators have weighed in with a resounding, “Yes, and hurry up!” The Wall Street Journal recently reported that more than 300 public companies have adopted such provisions, and that number is growing. Perhaps, however, it's a good idea to spend a few moments considering why a company may not want to do so, at least not right away.

First, while it's true that Delaware Chancery Court is very experienced and sophisticated, it is not the only such court in the land. In addition, some of these other courts may be, in some circumstances, friendlier to a particular business or set of issues—after all, the old cliché “home field advantage” does apply in some cases. Moreover, it's not clear that other state courts will respect choice of forum provisions. Some may regard as fundamental policy the strongly prevailing counter-concern of preserving the right of citizens to file suit in their own state courts.

Still want to move forward? It's obvious that no responsible board would take this sort of action without studying the issue carefully and getting the input of both an experienced corporate attorney and a seasoned litigator.

There's another step worth considering, notwithstanding the clarification of a board's authority that resulted from Chevron and FedEx's commendable litigation posture. Consider reaching out to major shareholders to get their view on forum selection provisions. While certainly not a requirement, this step may forestall claims that the board is insensitive to its shareholders’ views on this important topic. If shareholder views seem positive, the board could put the question to its shareholders on an advisory basis in the next annual meeting cycle. If the board is then surprised by a “no” vote, the board should stop there. However, if shareholders vote “yes,” then the directors should feel comfortable inserting forum selection provisions into their bylaws.

Priya Cherian Huskins

Priya Cherian Huskins, Esq., is senior vice president of Woodfruff, Sawyer and Company. She can be reached at phuskins@wsandco.com.

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