Many public and private companies have recently adopted exclusive forum provisions in their charter or bylaws. They can benefit a company and its shareholders by decreasing the risk of facing costly litigation across multiple, potentially distant jurisdictions and by helping to mitigate the consequent risk of varied results in differing jurisdictions.
By following a careful board deliberation process and putting exclusive forum provisions in place on a clear day, a company can ensure a more streamlined litigation strategy, increase predictability and consistency, and reduce transaction and litigation costs for the company and its shareholders.
There are two primary types of exclusive forum provisions. Companies should consider adopting a form of both in their charter or bylaws. Delaware has confirmed the validity of both types, and many jurisdictions often follow Delaware’s lead on corporate law matters. But, the law applicable to a particular company should be reviewed when considering this.
The first type of exclusive forum provisions applies to internal corporate affairs, derivative actions, or similar matters. In 2015, Delaware codified the validity of this type of exclusive-forum provision in the Delaware General Corporation Law (DGCL)
Securities Act Claims
The second type is a more recent evolution and relates to claims brought under the Securities Act of 1933 (the Securities Act). In 2018, the US Supreme Court said that state courts have concurrent jurisdiction over Securities Act claims, which vastly increased a company's potential exposure with regard to such claims.
To avoid facing potential state court actions for Securities Act claims, a company should consider making the federal district courts the exclusive forum for Securities Act claims. The Delaware Supreme Court has ruled that such a provision is facially valid under Delaware law if outlined in the certificate of incorporation.
One open question is whether the logic extends to similar provisions in a company’s bylaws. This question was not directly decided, but there is a good argument that a Securities Act exclusive forum bylaw would also be held to be facially valid since, for example, the court referred to the similar language of the DGCL that relates to bylaws:
Another open question is whether other states will enforce these exclusive forum provisions. While the landscape is still unfolding, two decisions in different California State Superior Courts enforced Securities Act exclusive forum provisions adopted by Delaware corporations
Recent trends in Securities Act litigation also point to the need for companies to consider adopting a federal forum provision in addition to the general provision described above. In 2019, there were 428 new class action Securities Act lawsuits filed.
This year-over-year increase of 40 percent over 2018 was nearly double the average of the prior 20 years. Of these cases, over 75 percent were either state-only or parallel state-federal filings. Total filing activity was down in the first half of 2020 compared to 2019, but similar to 2019, 45 percent of state Securities Act class action filings in the first half of 2020 had a parallel federal action. As a result of these parallel claims, companies are increasingly facing Securities Act claims in either state courts alone or multiple forums simultaneously.
While placing either type of exclusive forum provision in the charter tends to establish a stronger foundation, for most companies, it is far easier to amend the bylaws than it is to amend the charter. A company should weigh the relative burdens and benefits when determining whether to amend the charter or bylaws and consider whether other charters or bylaw updates or enhancements are appropriate as part of a more comprehensive review. In addition, although the major proxy advisory firms continue to develop their approach to exclusive forum provisions (particularly where unilateral board action is taken), companies should work closely with their directors and advisors to consider whether one or both types of exclusive forum provision would be beneficial to the company and its shareholders.