Opinion

Alison Frankel

Shareholder lawyers sue over Delaware forum-selection bylaws

By Alison Frankel
February 8, 2012

Kessler Topaz Meltzer & Check and Prickett, Jones & Elliott have absolutely nothing against Delaware Chancery Court. They’d be crazy if they did: The two firms were just awarded a record-setting $300 million fee for their work in the $1.3 billion Southern Peru derivative suit. Kessler Topaz and Prickett Jones lawyers make a very good living by litigating in Delaware.

So why, you might wonder, did the two firms team up with Klausner, Kaufman, Jensen & Levinson to file nine — yes, nine — complaints this week against corporations with bylaws mandating Delaware as the exclusive forum for shareholder litigation?

According to Lee Rudy of Kessler Topaz, it’s because the firms have had it with corporations attempting to curtail shareholder rights. “These cases aren’t saying Delaware is not an appropriate venue,” Rudy told me. “We want to allow the Chancery Court to say whether what these companies are doing is proper under Delaware law.” In parallel suits against Chevron, Curtiss-Wright, Danaher, Priceline, SPX, Superior Energy, AutoNation, Franklin Resources, and Navistar, the plaintiffs’ firms assert that the corporations adopted exclusive forum bylaws without consulting shareholders. Such bylaws, they argue, “conflict with federal constitutional and statutory provisions and impinge on federal jurisdiction and the jurisdiction of other state courts.”

Kessler Topaz and Prickett Jones filed the suits on behalf of four different pension funds and a couple of individual shareholders. (Here, by way of example, are the complaints against Danaher and Priceline; and here’s a post on the suits by Eckert Seamans partner Francis Pileggi, who first reported the filings at the Delaware Corporate & Commercial Litigation Blog.)

The corporate trend toward exclusive venue provisions for shareholder litigation dates back to a 2010 lecture by Stanford Law School professor Joseph Grundfest, who proposed that corporations enact such restrictions to curb the burgeoning problem of multijurisdictional M&A shareholder litigation. (Steven Davidoff of DealBook had a terrific analysis of Grundfest’s idea.)

But Rudy said venue provisions shouldn’t be adopted as bylaws, as opposed to charter amendments shareholders can vote on. “Bylaws are meant to govern internal operations,” he said. “This isn’t a proper use of bylaws.” Moreover, the challenged provisions require shareholders to sue in Delaware, but impose no forum restrictions on the corporations. They also may have implications for suits that name corporate executives, who may not be subject to personal jurisdiction in Delaware.

“Our firm represents a lot of sophisticated institutional investors,” Rudy said. “This is of significant concern to them.”

It’s apparently of concern to Chancellor Leo Strine Jr. as well. Strine, who has angrily refuted suggestions that Chancery Court is losing market share in shareholder litigation, has already signed up to preside over the first venue-provision challenge Kessler Topaz and Prickett Jones filed, and will presumably oversee the other eight as well.

For more of my posts, please go to Thomson Reuters News & Insight

Follow me on Twitter

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
  •