Over the past several years there has been an overwhelming abundance of class action shareholder litigation. A study by Cornerstone Research found that in 2013 alone, 94% of mergers and acquisitions worth over $100 million were challenged by shareholders. Many shareholder actions are multi-forum suits where companies are forced to defend against claims in several jurisdictions. These suits are, of course, expensive, and typically the only winner is the plaintiffs’ attorney. Recently, courts have been chipping away at aggressive shareholder litigation, and companies now have more options in defending against these suits.
Curbing Frivolous Suits With a Fee-Shifting Provision
One potential option in combating shareholder litigation would be to enact a fee-shifting bylaw provision. A fee-shifting provision shifts litigation expenses to a shareholder plaintiff who did not obtain a judgment that substantially achieves (in substance and amount) the full remedy sought. The aim of this provision is to deter shareholder litigation that typically results in significant monetary and other costs to a company by forcing potential plaintiffs to more thoughtfully assess the merits of the suit at the outset.
In May, the Delaware Supreme Court in ATP Tour, Inc. v. Deutscher Tennis Bund held that fee-shifting provisions in a corporation’s bylaws are facially valid and enforceable against shareholder plaintiffs under Delaware corporation law. While facially valid, the enforceability of such provisions “may turn on the circumstances surrounding [the provision’s] adoption and use” and would not be enforceable if it was adopted for an “improper purpose.” The court did not provide much guidance on what would constitute an “improper purpose,” but it did clarify that an attempt to deter litigation would “not invariably [be] an improper purpose.”
Among other considerations, companies should consider the following in deciding whether to adopt a fee-shifting bylaw provision.
Whether fee-shifting provisions can be used by a stock corporation has not been finally resolved. The ATP Tour decision examined the validity of a fee-shifting provision in the bylaws of a Delaware non-stock corporation. While the court stated that neither Delaware corporation law nor any other Delaware statute prevented fee-shifting bylaws, it is possible that the opinion only applies to non-stock corporations. In addition, the Delaware legislature is considering a bill that would limit the enforceability of a fee-shifting bylaw to non-stock corporations. If this bill is enacted, a fee-shifting provision in a stock corporation’s bylaws would be invalid.
The adoption of a fee-shifting bylaw provision could be challenged by an aggressive plaintiff as a breach of fiduciary duty. In adopting such a bylaw, it is important that the board act with an eye toward warding off that type of claim.
Institutional shareholders and advisory firms may recommend against fee-shifting bylaws. It is unclear how ISS, Glass Lewis and other institutional investors will react to the adoption of a fee-shifting provision. It is likely that many will not support fee-shifting bylaws or will review them on a case-by-case basis. Companies should consider the impact that adopting a fee-shifting bylaw provision may have on shareholder relationships and governance scores.
Jurisdictions outside of Delaware may not enforce a fee-shifting bylaw. This makes the consideration of a Delaware forum-selection provision (discussed below) all the more relevant.
Eliminate Multi-Forum Litigation and Forum Shopping with a Forum-Selection Clause
Enacting a forum-selection clause in a company’s charter documents may reduce the expense of shareholder suits by eliminating multi-forum litigation and forum shopping. The law has long recognized the enforceability of forum-selection clauses in commercial contracts. However, it was not until two key Delaware decisions in 2010 (In re Revlon, Inc. Shareholder Litigation) and 2013 (Boilermakers Local 154 Retirement Fund v. Chevron Corp.) that Delaware accepted the use of forum-selection clauses in a company’s bylaws. For more information on those decisions, see this Doug’s Note issued last summer.
Most recently, in Edgen Group, Inc. v. Genoud, Delaware (albeit through a transcript ruling) once again confirmed the enforceability of forum-selection clauses. However, the court raised two issues with enforcing a forum-selection clause: (1) whether the shareholders had consented to personal jurisdiction in Delaware because the clause itself did not contain a clause whereby the shareholder expressly consented to personal jurisdiction in Delaware, and (2) whether an “anti-suit injunction” (an order that prevents an opposing party from commencing or continuing a proceeding in another jurisdiction) in a Delaware court is the appropriate way to enforce a forum-selection clause.
With respect to the first issue, the court did not decide whether there was or was not personal jurisdiction over the plaintiff shareholder in Delaware, but noted only that “there is a litigable issue there.” With respect to the second issue, the court denied the request for an anti-suit injunction and noted that while an anti-suit injunction may be appropriate in some cases, it is the most aggressive way to enforce a forum-selection clause. Other less aggressive ways include seeking a motion to dismiss in the non-contractual forum or obtaining a default judgment in the contractually specified forum and seeking to enforce the judgment in the non-contractual forum on the grounds that a judgment has already been obtained. The court concluded that seeking a motion to dismiss in the non-contractual forum is probably the most appropriate first step in enforcing a forum-selection clause.
It is now clear that forum-selection clauses are enforceable in Delaware. However, whether these clauses will be successful in thwarting the wave of multi-forum law suits depends on whether other jurisdictions will enforce such clauses. Importantly, there have been conflicting decisions by California courts. In 2011, the U.S. District Court for the Northern District of California refused to dismiss a case against Oracle’s board despite the forum-selection clause in part because Oracle had adopted the clause when the company was already up for sale and anticipating shareholder litigation (see Galaviz v. Berg). More recently, in Groen v. Safeway a California superior court dismissed a shareholder class action against Safeway and upheld the enforceability of a forum-selection bylaw. There is currently a piece of the Safeway shareholder litigation pending in the Northern District involving a Delaware forum selection clause and it will be interesting to see where the Northern District comes out after the recent developments in this area.
Among other considerations, directors should consider the following in enacting a forum-selection clause.
A forum-selection clause cannot specify a sole and exclusive venue for external affairs such as tort claims. Instead, a forum-selection clause typically covers, among other things, (i) any derivative action or proceeding brought on behalf of the corporation, (ii) any action asserting a claim of breach of fiduciary duty owed by any director, officer or other employee of the corporation to the corporation or the corporation’s shareholders, (iii) any action asserting a claim arising pursuant to any provision of Delaware corporation law, or (iv) any action asserting a claim governed by the internal affairs doctrine.
A forum-selection clause should include an express clause consenting to jurisdiction. The forum-selection clause in Edgen Group did not contain a clause whereby the parties expressly consented to personal jurisdiction in Delaware. Any forum-selection clause should include an express consent to personal jurisdiction.
A forum-selection clause should allow the board to consent in writing to suit in an alternative forum. In Boilermakers Local 154 Retirement Fund, the court reasoned that this flexibility allowed the board to accommodate alternative venues in appropriate circumstances. Any forum-selection clause should include a similar right of waiver.
Review and consider the guidelines of institutional shareholders and advisory firms with respect to forum-selection clauses. Glass Lewis generally opposes forum-selection bylaws unless the corporation (1) provides a compelling argument as to why the provision would directly benefit shareholders; (2) provides evidence of abuse of legal process in other, non-favored jurisdictions; and (3) maintains a record of good corporate governance practices. In addition, Glass Lewis recommends voting against the chair of the governance committee when the board adopts a forum-selection clause without shareholder approval. ISS will review forum-selection bylaw proposals on a case-by-case basis and will take into account (1) whether the company has been materially harmed by stockholder litigation outside its jurisdiction of incorporation and (2) whether the company has adopted certain good governance practices.
After Halliburton: Countering Price Impact During Class Certification
In June, the U.S. Supreme Court decided Halliburton v. Erica P. John Fund. The Court examined two issues: (1) whether the “fraud on the market” theory established in Basic v. Levinson still applies, and (2) whether a defendant can rebut the presumption of “fraud on the market” loss causation during class certification by showing the absence of any impact on its price when the alleged misrepresentation became public knowledge (see this Doug’s Note).
In examining the first issue, the Court upheld the “fraud on the market” theory that allows the presumption of reliance by class action plaintiffs once the information is made public. Without this presumption, plaintiffs would have to establish that each plaintiff had actually heard and relied on the alleged misrepresentation. Leading up to the decision, there was some speculation that the Court would overturn the “fraud on the market” theory; thereby, effectively ending securities class action suits. Unsurprisingly, the Court did not find that Halliburton proved any “special justification” for overturning the decades old theory and upheld the “fraud on the market” theory.
In examining the second issue, the Court concluded that defendants are allowed to defeat the presumption of Basic by introducing evidence that shows an absence of price impact at the class certification stage. Before Halliburton, many circuits only allowed such evidence after class action certification, which in the most cases, is after the economic and reputational damage has been done. Now that such evidence will be accepted at the class certification stage, the following is expected:
Plaintiffs may be more targeted in the statements they identify as potentially misleading. This could shrink the scope of what has become shotgun-style complaints.
Economic analysis, including event studies, may increase during the certification stage and as a result, class certification will be more expensive. While studies and regression analysis have long been important in the assessment of damages and materiality, now such analysis will be presented earlier in the litigation process.
Class action shareholder litigation continues to be at the forefront of recent developments in corporate law. In the last several years, courts in various jurisdictions have chipped away at securities class action suits and progress continues to be made. It is important to stay abreast of these new developments and consider how or whether your company should act in response.