WSJ Article Regarding Ruling on Forum Selection Bylaws

By Cydney Posner

This article from The Wall Street Journal discusses various pro and con views on the recent Delaware ruling upholding exclusive forum bylaws. 

Characterizing the ruling as one that allows Delaware corporations to secure "Delaware home-field advantage," the article touts the Delaware courts as "relatively business friendly" courts that do not provide jury trials and are known for "high-velocity litigation schedules and stingy fee awards." Stanford Law School Prof. Joseph Grundfest expects to see "a resurgence in Delaware-only bylaws. ‘It might take a bit of time for boards and counsel to get their arms around this new reality. But I would expect that the adoption rate will pick up sharply as soon as counsel become comfortable that the uncertainties are resolved,' he said."

On the other hand, the article notes that "Delaware-only bylaws have provoked opposition—from plaintiffs' law firms irked at the loss of leverage, and from shareholder-advisory firms, which say that such provisions remove a crucial decision from the hands of shareholders…. Critics said the bylaws are unfair because they can be put in place without consulting shareholders. They said the choice of forum belongs to plaintiffs and that often they have valid reasons for asking, for example, a New York court to rein in the leaders of a business that is based in the state. ‘It is undesirable for boards to have the power to adopt such limitations unilaterally without shareholder approval,' said Lucian A. Bebchuk, a law professor at Harvard University and an expert on corporate governance. ‘Directors should not be setting the rules governing how they themselves may be sued.' " Similarly, the $160.4 billion New York State Common Retirement Fund "believes that forum-selection bylaws restrict shareholder rights," and "generally votes against exclusive-forum proposals because it limits shareholders' ability to hold corporations accountable for their actions." (Note that, the proxy advisory firms have policies with regard to their votes on exclusive forum bylaw proposals: ISS says that it evaluates them on a case-by-case basis, but seems to generally recommend against, and Glass Lewis's policy is generally to recommend against. The ruling though raises the question of the effect on their recommendations regarding election of board members when a company has adopted a bylaw without shareholder approval. Per Amy Wood, ISS will note the adoption in its next report but that action alone will not trigger negative recommendations for directors. Glass Lewis takes the position that, if a board adopted a forum selection provision without shareholder approval, it would recommend a vote against the chair of the governance committee.)

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