Wednesday, February 8, 2012
Francis Pileggi brings to my attention a number of suits filed in the past two days against Delaware companies with exclusive forum provisions in the bylaws. The exclusive forum bylaws are typically adopted by boards and not shareholders. They purport to restrict any shareholder litigation based on state law claims to the courts of the state of incorporation. Recent interest in such provisions is a result of the recent rapid increase in transaction-related litigation. Steven Davidoff's paper on The Great Game is good background, as is Bernie Black's paper, Is Delaware Losing its Cases? and Randall Thomas & Bob Thompson's paper Litigation in Mergers & Acquisitions.
Here are two of the current complaints: Sutton_vs_AutoNation_Inc and Tejinder_Singh_vs_Navistar_Int. They both attack a bylaw provision that was unilertally adopted by a board - so no shareholder vote. A similar bylaw was struck down last year in Galaviz v Berg as lacking sufficient indicia of consent. These complaints are worth giving a read. There's merit to the argument that unilaterally adopted bylaws shouldn't bind shareholders. But the complainants also raise a number of other interesting questions. I'm already on record supporting exclusive forum provisions in corporate charters, so I'll be following these cases with great interest.