A Forum Selection Clause Issue That You May Not Have Heard About Until Now

In a forthcoming paper, Professor Joseph A. Grundfest at Stanford Law School examined the incidence of forum selection provisions by chartering and headquarters jurisdictions. It may come as a surprise to very few that California ranked first:

“The largest percentage of publicly traded entities with intra-corporate forum selection provisions, 31.6% of the sample (42 of 133), are headquartered in California, and all of these entities designate Delaware as the forum for the resolution of intra-corporate disputes.”

The History and Evolution of Intra-Corporate Forum Selection Clauses: An Empirical Analysis, forthcoming 37 Del. J. Corp. L. 2012, available at Social Science Research Network.

Professor Grundfest also found that a huge disparity exists between the percentages of public companies with material contracts containing forum selection clauses in material agreements (39.56%) and those with intra-corporate forum selection clauses in their articles of incorporation or bylaws (0.18%). Professor Grundfest’s article discusses why this disparity exists.

Rather than ask why, I thought it could be more interesting to ask “Does this disparity have any practical implications?” For example, a Delaware corporation headquartered in California may provide in its articles of incorporation that the Court of Chancery is the sole and exclusive forum for any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of the Corporation to the Corporation or the Corporation’s stockholders. Because the corporation is headquartered in California, it is possible, if not likely, that its employment agreements provide broadly that disputes related to or arising under those agreements will be decided in the California Superior Court. While the articles of incorporation may be considered as contracts between the corporation and its shareholders and amongst the shareholders, on what basis can they be considered a contract between the corporation and its officers and employees? If the corporation brings suit against an officer for breach of fiduciary duty, that suit would seem to be governed by a valid choice of forum clause in the employment agreement. Why should the result be different if a derivative suit is filed since it is brought on behalf of the corporation?

 


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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