Exclusive Forum Bylaws Gain Momentum: California Superior Court Enforces Delaware Exclusive Forum Bylaw, Consistent With Decisions in Several Other States; Little Negative Shareholder Reaction Seen in 2014 Proxy Season for Companies That Unilaterally Adopted Exclusive Forum BylawsSullivan & Cromwell LLP - May 28, 2014
Following the Delaware Court of Chancery’s decision in July 2013 upholding the validity of exclusive forum bylaws, a number of corporations, including over two dozen S&P 500 companies, amended their bylaws to include these provisions, and the provisions were commonly included in the charters or bylaws of companies in initial public offerings. Many public companies, however, determined to take a wait-and-see approach, in order to assess whether non-Delaware courts would enforce the bylaw and whether companies that adopted the bylaw received negative investor feedback in the 2014 proxy season or otherwise.
To date, all state courts that have considered the enforceability of exclusive forum provisions have upheld them, including courts in California, New York, Illinois and Louisiana. In addition, while proxy advisory firms and some institutional investors and investor groups remain generally opposed to these provisions, shareholders more broadly do not appear to have resisted their adoption or punished directors or companies that have adopted them. In light of these developments, and the significant benefits that an exclusive forum bylaw can afford to companies by reducing costs of multi-jurisdictional litigation, companies should give serious consideration to adopting such a bylaw.
Taking into account the developments over the past year, this memorandum examines:
- The nature and benefits of exclusive forum provisions;
- The treatment of exclusive forum provisions by non-Delaware courts;
- The manner in which proxy advisory firms and shareholders have reacted to the adoption of such provisions; and
- Some key considerations relating to the drafting and adoption of such provisions.