The Brouhaha Over Intra-Corporate Forum Selection Provisions: A Legal, Economic, and Political Analysis
Business Lawyer. Feb2013, Vol. 68 Issue 2, p325-410.
78 Pages Posted: 19 Oct 2012 Last revised: 8 Feb 2014
Date Written: February 2013
More than 300 publicly traded entities have adopted intra-corporate forum selection (“ICFS”) provisions either in their charters or as bylaw amendments, often without prior stockholder approval. These provisions have been adopted in response to a sharp increase in intra-corporate litigation outside the state of incorporation. The academic literature suggests that this increase is animated by economic incentives of the plaintiffs’ bar that can be inimical to stockholder interests. ICFS provisions are an effective private ordering mechanism for addressing this trend in a manner that responsibly protects stockholder rights.
Plaintiffs have nonetheless brought suit in Delaware challenging the validity of ICFS provisions. We review the governing law and demonstrate that ICFS provisions are valid subject matter for charters and bylaws. Stockholders are also on notice that boards have the authority to amend bylaws without prior stockholder consent, and the “vested rights” theory is long repudiated. Assertions that stockholders cannot be bound by ICFS bylaw provisions adopted without prior stockholder consent are thus incorrect. Speculative claims that ICFS provisions might later be exercised in a manner that violates a fiduciary duty or causes injustice will also not cause them to be invalidated: charter and bylaw provisions are presumed to be validly adopted and hypothetical speculation regarding instances of potential future abuse are insufficient to invalidate the provisions as adopted. This presumption is particularly powerful in the case of ICFS provisions where boards retain the option not to enforce those provisions if enforcement is later deemed inconsistent with fiduciary obligations.
ICFS provisions are also not self-enforcing. Foreign courts hearing petitions to enforce ICFS provisions will most frequently apply the rule established by the Supreme Court’s Bremen decision to protect the interests of foreign-filing stockholders. Absent a finding that plaintiffs’ rights under the chartering state’s laws cannot be adequately protected by courts in the chartering state, ICFS provisions are likely to be enforced in the very large majority of circumstances.
Keywords: Forum selection, litigation, Delaware, intra-corporate litigation, by-laws, charters
JEL Classification: K22, K41
Suggested Citation: Suggested Citation