The Benefits And Challenges Of Forum Selection Bylaws

In the past year, a number of companies have amended their bylaws to require that shareholder derivative lawsuits are resolved in the Delaware Chancery Court. This recent spike in the use of company-friendly forum selection clauses comes at a time when lawsuits challenging mergers are rampant. According to Reuters, such lawsuits have tripled from 107 in 2007 to 335 in 2010, despite a decrease in deal volume.

Such forum selection clauses serve a few purposes. First, they prevent companies from having to defend actions in multiple jurisdictions. Often times, shareholders bring derivative lawsuits both in the state where the company is incorporated and where the company is headquartered. Further, a forum selection clause that requires a lawsuit to be resolved by the Delaware Chancery Court takes advantage of Delaware’s well-developed body of corporate case law, the Court’s expertise in handling these types of cases and its general reluctance to delay or enjoin transactions. These factors can significantly limit the uncertainty and cost associated with a lawsuit and expedite a resolution.

The trend toward forum selection clauses in company bylaws seems to have been inspired by a comment made in dicta by Vice Chancellor Laster in the 2010 case of In re Revlon, Inc. Shareholders Litigation where he suggested that a company could effectively mandate a chosen forum for the resolution of shareholder lawsuits, stating that "if boards of directors and stockholders believe that a particular forum would provide an efficient and value-promoting locus for dispute resolution, the corporations are free to respond with charter provisions selecting an exclusive forum for intra-entity disputes." Since the Vice Chancellor's comment, numerous companies have adopted forum selection clauses in their bylaws.

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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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