On Monday, as noted in this article from “The Deal,” Bill Ackman abandoned his unorthodox referendum approach to have shareholders vote at a meeting set up outside of Allergan’s bylaws on a nonbinding proposal that would urge Allergan’s board to engage in “good faith” negotiations with Valeant – and instead is now waging a traditional proxy contest. Here are articles about Ackman’s initial approach:

– WSJ’s “Lawmaker Raises Concerns to SEC About Ackman’s Allergan Referendum”
– Representative Royce’s Letter to SEC asking for review of the innovative Pershing Square plan
– The Activist Investor’s “Annals of Investor Relations: What CEOs Really Think of Investors”
– DealBook’s “In Allergan Bid, a Question of Insider Trading”
– The Activist Investor’s “A Shareholder “Get Together”
– The Deal’s “Ackman pushes unorthodox shareholder proposal”

Here’s analysis from Cliff Neimeth of Greenberg Traurig:

Net/net, with respect to the facial validity of (non-fee shifting) exclusive forum bylaws (adopted unilaterally by the board) or exclusive forum Certificate of Incorporation provisions (approved and recommended by the board, with subsequent stockholder adoption), one of the key underpinnings of the Delaware Chancery Court in the Chevron decision was that such provisions address merely the “where” of the litigation and do not interfere with or unduly deter the “if, how, why and when” of the litigation. Whether that rationale is compelling or not, in other words (in the Court’s view), the former is merely procedural in nature and consistent with Delaware’s internal affairs doctrine and protecting Delaware corporation’s from the threat of duplicative litigation in non-Delaware jurisdictions where flawed interpretations of Delaware law could be made and inconsistent judgments could be rendered based on the same suite of facts arising out of the same transaction presented in multiple forums.

The latter context seemingly impacts the decision of whether, how and when to institute litigation, and the nature of the claims asserted and remedies sought, etc. Thus, the latter context may be considered more of an intrusion on the plaintiff’s substantive rights and, therefore, it is potentially preclusive. The goal of reducing and deterring strike suits and frivolous “shakedown” actions is obviously laudable and necessary (given how out of hand the situation has become every time, or 94% of the time to be exact, an M&A or other extraordinary corporate transaction is announced). However, the Delaware bar apparently does not believe that throwing the “baby out with the bath water” is a prudent or practical solution and a rush to adopt such provisions in the wake of the ATP Tour non-stock corporation case is a bit too much of a knee-jerk, check the box response. It is still possible (but not overly probable) that a compromise can be reached in the legislature to narrow the scope of such provisions so as to allow some level of private ordering in a permissible and practical form.

As in life, things are often a matter of degree. Sometimes a simple aspirin is needed to cure a headache and resorting to the guillotine is a disproportionate and unnecessary response. Although, to date, numerous Delaware stock corporations (and some corporations in Illinois, California, Maryland and several other jurisdiction) have adopted Chevron-type exclusive forum bylaws, there still remain certain issues regarding consent, personal jurisdiction and other mechanics.

That said, I would continue to recommend, in appropriate circumstances, the adoption of (non-fee shifting) exclusive forum bylaws for Delaware corporations. Interestingly, and importantly, despite ISS’ and Glass-Lewis’ less than enthusiastic response to such bylaw provisions, the reaction to date from a fair number of major index funds , regulated asset managers and other (non-union and non-hedge fund) institutions has been positive to neutral (even where the corporation does not have a perfect corporate governance scorecard and has not experienced material harm by reason of its previous involvement in multi-jurisdictional litigation involving the same claims and arising out of the same facts).

One last word of caution here. Facial validity is just that. “As applied” validity is a different matter. Although the adoption of a properly (and narrowly tailored) exclusive forum bylaw adopted in the cool of night may be valid on its face ab initio (under the DGCL or another state’s corporation laws) it’s use in a particular current or later-evolving context may be challenged on fiduciary (i.e., care and loyalty) and other grounds depending on the facts and circumstances. That which is valid as a matter of statute or organic authority does not mean its application in a given setting is fair, equitable or reasonable. Accordingly, directors need to weigh the risks and benefits of adoption carefully based on the best current information available to them and with the advice of capable professional advisors, and if a post hoc situation arises implicating such provisions, the directors need to consider whether to consent to multiple actions or to let the bylaws operate as intended.

Also see this blog by Keith Bishop entitled “Fee Shifting Bylaw Provisions May Face Constitutional Limitation”…