Saturday, April 15, 2017

And now for something completely different about Snap and shareholder rights

So I was looking over Snap’s S-1, and I discovered this:

Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for:

  • any derivative action or proceeding brought on our behalf;
  • any action asserting a breach of fiduciary duty;
  • any action asserting a claim against us arising under the Delaware General Corporation Law, our amended and restated certificate of incorporation, or our amended and restated bylaws; and
  • any action asserting a claim against us that is governed by the internal-affairs doctrine.

Our amended and restated certificate of incorporation further provides that the federal district courts of the United States of America will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act.

The first provisions are a fairly unremarkable (these days) set of forum selection clauses, but in that last point, Snap has gone a step further by attempting to control the forum of federal claims in addition to state claims.  In so doing, Snap is obliquely referring to the ongoing dispute about whether SLUSA requires that Section 11 class actions be litigated in federal court, or whether, instead, class actions under Section 11 may be maintained in state court.  The Supreme Court is considering whether to rule on this issue, but Snap has apparently decided to belt-and-suspender it.

I don’t know if this is a common provision in IPO documents these days, but I do hope that if the enforceability of the provision is ever litigated, courts will not blindly assume that such provisions are “contractual” and therefore as binding as any other forum selection provision in an ordinary contract between transacting parties.

I’ve written quite a bit about whether charters and bylaws are contractual, and the enforceability of forum selection provisions.  See Manufactured Consent: The Problem of Arbitration Clauses in Corporate Charters and Bylaws, 104 Geo. L.J. 583 (2016); Limiting Litigation Through Corporate Governance Documents, in Research Handbook on Representative Shareholder Litigation (Sean Griffith et al., eds., forthcoming 2017).  One of the arguments I've repeatedly made is that courts should not simply assume that charters and bylaws may dictate terms about federal claims as they have about state law internal affairs claims. 

Charters and bylaws are not like ordinary contracts; instead, the state of incorporation determines the permissible provisions, the procedures by which they can be amended, the fiduciary duties of managers when invoking these provisions, and the rights and powers of shareholders to influence their content. (For example, states decide whether the clause must appear in the charter, whether shareholders must vote, and whether and under what conditions management may waive these provisions).  States are not positioned to make the appropriate policy determinations when the matter involves a federal, rather than state, regulatory scheme.

Indeed, it is not obvious that Delaware even authorizes the charter provision that Snap has adopted.  In 2015, Delaware amended its law to authorize corporations to adopt charter and bylaw provisions that select Delaware as a forum for internal affairs claims.  See DGCL § 115.   As I have argued previously, that statute (and related Delaware caselaw) should be interpreted to mean that only internal affairs claims, and not other kinds of claims, may be governed by charters and bylaws.  But even if the statute is interpreted to allow corporations broad freedom to dictate the terms on which plaintiffs may bring federal securities claims, as some have suggested, see John C. Coffee, Update on “Loser Pays” Fee Shifting; Stephen M. Bainbridge, Fee-Shifting: Delaware’s Self-Inflicted Wound, 40 Del. J. Corp. L. 851 (2016), the broader point is that there is no reason that Delaware should be deciding these important matters of federal policy.

To be sure, one might argue that this is no different than ordinary contracts – state law, too, determines the rules that govern ordinary contracts, and yet these contracts may contain enforceable forum selection provisions regarding federal rights. 

But that is not quite the same.  We may assume that Congress generally intended to import into federal law certain state law standards regarding contracts and corporate law, but that presumption may be overcome depending on the particular state law in question.  See generally Kamen v. Kemper Financial Services, 500 U.S. 90 (1991).  It is not obvious that Congress intended that state corporate law – including idiosyncratic approaches to shareholder powers within the corporation – would govern forum selection for federal claims, especially since state law did not even grant corporations these powers until 2013.  See Boilermakers Local 154 Ret. Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013).

But more fundamentally, as I have explained in the context of arbitration, within the corporate structure, shareholders and directors are not on equal footing.  Shareholder power is sharply limited by legal ground rules that vest directors with broad discretion to take action on behalf of the corporation as they see fit.  The justification for this power differential is that corporate directors are better positioned to make decisions on behalf of the corporation, and that shareholders are too uninformed, selfish, or heterogeneous to be trusted with the power to determine the corporation’s fate.  Such an approach is at odds with the general concept  of “contract,” which is predicated on the assumption that each party is capable of bargaining for his or her self interest, and that welfare across parties is maximized when the parties are permitted to bind themselves to arrangements they believe best for themselves.  Unlike in contract, within the corporation, shareholders are not treated as autonomous arm's length bargainers.  See also Jill E. Fisch, Governance by Contract: The Implications for Corporate Bylaws (California Law Review, forthcoming).  

So, bringing this back to Snap’s articles of incorporation, if courts or the SEC decide that – for reasons of federal policy – it is best for companies and their shareholders that corporations be permitted to select a federal forum for federal securities claims in their charters/bylaws, that’s one thing, and on that point I remain agnostic.  But what they should not do is assume that Snap’s charter is a “contract” that binds the shareholders to a federal forum, in the same manner as a forum selection clause in an ordinary contract between transacting parties.

Ann Lipton | Permalink


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