Shareholder Lawsuits, Status Quo Bias, and Adoption of the Exclusive Forum Provision

Abstract

Observers note a trend of shareholder lawsuits migrating out of Delaware. This trend is a manifestation of a litigation strategy by plaintiffs’ counsel to avoid Delaware’s aggressive policing of agency costs in acquisition-related shareholder litigation and to gain control over such litigation by bringing these cases outside of Delaware. To the extent agency costs drive acquisition-related litigation, such litigation can be costly to shareholders without much by way of tangible benefits to them. In addition to being potentially wasteful for shareholders, a sustained outward migration of cases from Delaware to other venues may threaten Delaware’s ability to maintain and develop its own corporate law. For these reasons, various stakeholders including shareholders, the judiciary, and policymakers, have an incentive to consider the implications of these multiforum litigation strategies and formulate a response. Some commentators have proposed that firms adopt forum selection provisions in their corporate charters and bylaws as a way of reducing incentives for shareholder plaintiffs to engage in wasteful lawsuits or forum shopping. Notwithstanding the fact that incorporators are free to contract around default rules and adopt innovative self-help provisions, few firms have taken that step. This Article argues that insights from behavioral economics can provide some understanding of why this may be the case. In particular, status quo bias in contracting reduces incentives for incorporators to pursue more creative approaches to drafting the corporate contract. However, status quo bias may be overcome through the use of opt-in menus, which have been useful in increasing contractual flexibility in other contexts in corporate law and may prove helpful in overcoming cognitive constraints to innovation. By increasing flexibility in corporate contracts, shareholders should be able to moderate the effects of status quo bias and develop charter terms more likely to reflect their true preferences. Properly structured exclusive forum provisions will reduce incentives to bring wasteful litigation while leaving open opportunities for shareholders to bring valuable lawsuits.

Keywords: exclusive forum, shareholder lawsuit, status quo bias, menu

JEL Classification: K22