In its latest string of recent impact decisions, the Delaware Court of Chancery significantly “advanced the ball” in an effort to redress the cost-inefficiencies, management and board distraction, and potentially inconsistent judicial results, of defending against (duplicative) multijurisdictional litigation arising from the same suite of facts and circumstances in a single challenged transaction. Chancellor Strine, in his judgment on the pleadings, upheld the facial validity of exclusive Delaware forum selection bylaws adopted by unilateral board action on a contractual (i.e., organic instruments) and statutory (i.e., DGCL) basis. He likened the authority of Delaware directors to adopt such bylaws to the authority of Delaware directors to unilaterally adopt a stockholder rights plan (or” poison pill”) as a reasonable response to a perceived threat to corporate policies and effectiveness. (The threat here being the consequences and potential damage to the corporation of the aforementioned redundant multi-forum litigation).
Typically, these exclusive forum bylaws (which have been adopted by several hundred corporations over the past few years) address actions brought by stockholders in their capacity as such in derivative litigation, breach of fiduciary duty litigation, actions brought under and involving interpretations of the DGCL, and litigation concerning Delaware’s “internal affairs doctrine”
Chancellor Strine’s validation of these bylaws as a proper exercise of the Board’s authority will neither preclude nor deter contextual litigation challenges alleging that the board breached its fiduciary duties of care and loyalty or that the board’s unilateral adoption, use or application of such bylaws in a given circumstance is fundamentally unreasonable, disloyal, unfair or inequitable.
Moreover, It is not entirely certain how, on appeal, the Delaware Supreme Court may rule. However, Chancellor Strine’s decision and analyses are likely drawn narrowly enough to be left unaltered on appeal. It is also possible that the Delaware legislature could pick up the gauntlet on this subject in the future (but not in time for the August 1, 2013 effective date of this year’s DGCL amendments).
To the extent that certain institutional investors believe that the unilateral adoption and use of exclusive forum bylaws are inappropriate, they can always avail themselves of the proxy machinery to seek to implement organic change (e.g. repeal or amendment of the bylaws or a precatory proposal to amend the certificate of incorporation) or board compositional change.
Despite the decision, ISS will continue to review exclusive forum bylaws on a case-by-case basis taking into account specific corporate governance features of the issuer in question (i.e., the absence of a classified board and poison pill, and majority voting in the election of directors) and whether the issuer suffered past material damage as a result of defending multijurisdictional litigation; whereas Glass-Lewis will continue to recommend against such provisions and recommend “withhold authority” against the Chairman of the Corporate Governance Committee or the Board Chairman in the case of bylaw amendments adopted by unilateral board action.