79 Pages Posted: 30 Jun 2015 Last revised: 6 Aug 2015
Date Written: June 30, 2015
This paper empirically analyzes a private ordering solution to multiforum shareholder litigation: exclusive forum provisions in corporate charters and bylaws. These provisions, whose use has become quite widespread, require that all corporate law-related disputes be brought in a single forum, typically a court in the statutory domicile. Using hand-collected data on the 746 U.S. public corporations that have adopted the provision, we examine what drives the growth in these provisions and whether, as some critics contend, their adoption reflects managerial opportunism. We separately analyze companies that adopt the provision at the IPO stage (which usually occurs through a charter amendment) and those that adopt “midstream” or after IPO stage (which usually occurs through a bylaw amendment).
We find that nearly all new Delaware corporations adopt the provision at the IPO stage, and further that the transition from zero to near-universal IPO adoption is driven by law firms. The characteristics of individual companies appear to play little or no role in adoption decisions. Instead, the pattern of adoption follows what can be described as a light switch model, in which law firms suddenly switch from never adopting to always adopting the provision in the IPOs they advise. This pattern contrasts with the decision to include takeover defenses in IPO charters, and suggests that lawyers have come to perceive that exclusive forum provisions are universally value-increasing.
For midstream adoptions, we compare corporate governance features of midstream bylaw adopters to a matched sample of non-adopters in order to test the hypothesis that midstream bylaw adoption reflects managerial opportunism. If the hypothesis were correct, then we would expect to find that midstream adopters exhibit poor corporate governance compared to nonadopters (using the metrics of good governance practices as identified by critics of the provisions). We find, however, that there are either no significant differences in governance or that it is actually adopters that have higher quality governance features. We also find no significant differences in governance and ownership structures between firms whose boards adopt the provisions as bylaws and those who obtain shareholder approval. The absence of significant differences across firms using disparate adoption procedures suggests that the method of adopting an exclusive forum provision – whether with or without shareholder approval – should not be a matter of import for investors.
Keywords: exclusive forum clauses, multiforum litigation, shareholder litigation
JEL Classification: K22, G34
Suggested Citation: Suggested Citation
Romano, Roberta and Sanga, Sarath, The Private Ordering Solution to Multiforum Shareholder Litigation (June 30, 2015). European Corporate Governance Institute (ECGI) - Law Working Paper No. 295/2015; Yale Law & Economics Research Paper No. 524. Available at SSRN: https://ssrn.com/abstract=2624951 or http://dx.doi.org/10.2139/ssrn.2624951
By Eric Talley
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