Restricting Shareholder Derivative Suits To Delaware: Stop, Look, And Listen

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Some prominent commentators recently have urged public companies incorporated in Delaware to adopt provisions requiring that shareholder derivative suits against them be litigated in the Delaware Court of Chancery. A few public companies have heeded that advice, most notably Oracle. On January 3, 2011, a federal judge declined to enforce the Oracle venue provision. The decision is the first on the issue, although it is not likely to be the last. In light of the uncertainty in the area and the substantial litigation likely to occur over such provisions, we think the prudent course for our clients is not to adopt such provisions at this time.

For years, the Delaware Chancery Court has enjoyed a well-deserved reputation for expertise on matters of corporate law. The vast majority of our clients are incorporated in Delaware. Our clients, like many other technology companies, frequently have litigated in the Delaware Chancery Court and appreciate the sophisticated nature of that court in reviewing issues relating to the internal affairs of the corporation.

Those who advocate venue-restriction clauses for shareholder suits contend that it is in the corporation’s interest to have matters of Delaware corporate law decided by the Chancery Court, not by other courts applying Delaware law. They believe that companies can adopt either mandatory or permissive venue restrictions (i.e., requiring that suit be brought only in Delaware versus empowering the board to insist that a particular case proceed in Delaware). They contend that venue restrictions can be adopted as part of the company’s articles of incorporation or bylaws.

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