Saturday, January 20, 2018
Sometimes it feels like I’m on the litigation-limiting-bylaw beat.
To briefly recap, in several prior posts, a law review article, and a forthcoming chapter, I’ve argued that corporate governance documents are not contracts in the traditional sense and thus should not be read to impose contract-like obligations on shareholders (critical for, among other things, the applicability of the Federal Arbitration Act). I’ve also argued that a corporation’s governing documents cannot impose forum-selection or other limitations on shareholders’ ability to press federal claims or claims that arise under the law of a nonchartering state.
This is relevant because some companies have gone public with forum selection provisions in their charters purporting to restrict Securities Act claims to federal court. Snap was one, as I discuss in more detail here; apparently, other companies include Blue Apron, Stitch Fix, and Roku. The Supreme Court is set to decide this term whether SLUSA requires that Section 11 class actions be brought in federal court, but that’s a separate issue from whether corporations can use private ordering to require that all Section 11 claims be brought in federal court.
Anyhoo, it looks like New Jersey is getting ready to pass a bill – modeled to some extent on a statute passed by Delaware a couple of years ago – that would allow corporations to include forum-selection provisions in their charters and bylaws. Under the New Jersey bill, forum-selection bylaws and charter provisions could only be used to restrict plaintiffs to New Jersey federal and state courts (i.e., they could not be used to select other fora, including arbitral fora), and - critically - it appears the intent of the provision is to limit its application to state law claims. The text reads:
N.J.S.14A:2-9 is amended to read as follows…
[T]he by-laws may provide that the federal and State courts in New Jersey shall be the sole and exclusive forum for:
(i) any derivative action or proceeding brought on behalf of the corporation;
(ii) any action by one or more shareholders asserting a claim of a breach of fiduciary duty owed by a director or officer, or former director or officer, to the corporation or its shareholders, or a breach of the certificate of incorporation or by-laws;
(iii) any action brought by one or more shareholders asserting a claim against the corporation or its directors or officers, or former directors or officers, arising under the certificate of incorporation or the "New Jersey Business Corporation Act," N.J.S.14A:1-1 et seq.;
(iv) any other State law claim, including a class action asserting a breach of a duty to disclose, or a similar claim, brought by one or more shareholders against the corporation, its directors or officers, or its former directors or officers; or
(v) any other claim brought by one or more shareholders which is governed by the internal affairs or an analogous doctrine.
Now, we usually think of derivative claims as state law claims but they don’t have to be (i.e., Section 10(b) claims can be brought derivatively, etc). Still, I think language like “any other claim … which is governed by the internal affairs or analogous doctrine” suggests the intent here was to limit the bill to state law.
In any event, we may get some clarity on these issues. D&O Diary is reporting that a shareholder lawsuit has been filed against Blue Apron, Roku, and Stitch Fix, seeking a declaratory judgment that the forum-selection provisions of those companies’ governing documents are invalid to the extent they purport to extend to federal law claims.
We’ll see how far along the case gets; it would be nice for courts to explore this issue in more depth.