DealLawyers.com Blog

Here’s news from Cliff Neimeth of Greenberg Traurig:

Since the Delaware Court of Chancery’s decision a couple of years ago in Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013), and the adoption effective August 1, 2015 of Section 115 of the DGCL (which essentially codified Boilermakers), I’ve adopted exclusive forum bylaws (“EFBs”) for dozens of Greenberg Traurig’s Delaware corporate clients pursuant to unilateral board action. We’ve especially counseled such adoption concurrently with, or immediately preceding, the public announcement of merger, business combination and similar extraordinary corporate transactions (in general anticipation, but obviously prior to the commencement or overt threat, of fiduciary litigation challenging the transaction and the actions and decisions of the board). Such “same-day” adoption was expressly upheld in City of Providence v. First Citizens BankShares, Inc., 99 A.3d 229 (Del. Ch. 2014), although the decision was legislatively modified on other grounds pursuant to Section 115 of the DGCL.

To date, hundreds of mostly (but not exclusively) public Delaware corporations have adopted EFBs and, when challenged in litigation outside of Delaware, the courts of several non-Delaware states – mostly in preliminary “stay” and other delayed-intervention hearings – have deferred to Delaware’s strong policy interest, at least in the first instance, in seeking to retain exclusive jurisdiction over the adjudication of intra-corporate disputes animating the internal affairs of Delaware corporations before subjecting the corporation to the defense of multi-jurisdictional litigation arising out of the same facts and circumstances and the risk of inconsistent judgments and erroneous interpretations of Delaware’s statutory and judicial corporate law.

The decision of the Oregon Supreme Court (Roberts v. TriQuint Semiconductor, Inc.) is significant – not just because it is the latest non-Delaware court decision acknowledging the facial and contractual validity of Delaware EFBs – but because it appears to be the only reported non-Delaware appellate court decision, to date, fully addressing on the merits the contextual (i.e., “as-applied”) validity of the EFBs. Moreover, the decision (which reversed the decision of the lower Oregon court) confirmed that an EFB adopted two days prior to the announcement of an MOE involving the subject corporation did not constitute unreasonable proximity.

The decision essentially reiterates the policy rationale for upholding EFBs that the Delaware courts (and certain non-Delaware courts) have articulated to date, although the Oregon Supreme Court noted that Oregon law controlled the determination by an Oregon court of whether the EFB of a Delaware corporation was enforceable.

It’s important to make sure that an EFB expressly allows the Delaware corporation to waive the EFB and/or consent to the jurisdiction of a non-Delaware forum. Indeed, there may be circumstances where the adoption of an EFB is inappropriate or unreasonable and, as oft-cited by the Delaware courts (especially in an “as-applied” fiduciary litigation), inequitable action does not become permissible just because it is legally possible. Also, remember that pursuant to Section 115 of the DGCL it is permissible for an EFB to expressly confer on a non-Delaware court jurisdiction over the adjudication of non-Delaware disputes, provided that such extra-Delaware jurisdiction is not exclusive. It is in this latter regard that the City of Providence decision was legislatively modified by Section 115 of the DGCL.

Notably, despite ISS’ and Glass-Lewis’ general disdain for EFBs adopted without stockholder approval and their policy of recommending “withhold authority” against corporate governance committee chairs in such context, that tail shouldn’t – in itself – wag the dog in a situation where the adoption of an EFB is otherwise warranted as determined in good faith by the Board after careful consideration of all the relevant facts, risks and merits. This is especially true when an extraordinary corporate transaction is being announced and the surrounding facts are such that it is a “clear day” for adoption of the EFB. To date, EFBs adopted unilaterally have not faced significant adverse reaction from the portfolio managers and proxy voting departments at leading national index funds, quant investors and regulated asset management firms.

The TriQuint decision should help further deter the commencement of multi-jurisdictional litigation against Delaware corporations in a (non-Delaware) jurisdiction where such corporation is headquartered or otherwise has a strong commercial nexus. Time, of course, will tell.