Delaware judge: Don’t sue in Delaware to enforce forum clauses
Davis Polk & Wardwell had an interesting post last week at the Harvard Law School Forum on Corporate Governance. As the post noted, shareholder lawyers recently dropped their appeal of a ruling in June by Chancellor Leo Strine of Delaware Chancery Court that upheld the validity of corporate bylaws requiring shareholders to litigate in Delaware. With Strine’s ruling in Boilermakers v. Chevron entrenched, at least for now, as Delaware precedent, Davis Polk asked, is there any reason why businesses shouldn’t rush to adopt forum selection provisions? According to the firm, about 120 corporations, mostly in Delaware, have done just that. But Davis Polk also said there are a couple of reasons to wait. For one thing, shareholders may look askance at forum selection provisions, and could even try to extract revenge against board members who push for them. And for another, it’s not clear that judges in jurisdictions outside of Delaware will obey the law according to Leo Strine.
“The non-Delaware judge considering the motion may be influenced, but will not be bound, by the Chevron decision,” the Davis Polk post said. “We may imagine, and some have confidently predicted, that over time a body of law will develop upholding these provisions under the internal affairs doctrine. But that day has not yet arrived, and in the meantime companies will have to fund some level of litigation to defend their position. These companies may, like Chevron and FedEx, have the satisfaction of having moved the law in a positive direction, but others may be happy to have the trailblazers reap the honor.”
Vice-Chancellor Travis Laster of Delaware Chancery Court raised an obstacles for forum selection trailblazers in a ruling from the bench last Tuesday in Edgen Group v. Genoud, a case in which Edgen was trying to enforce a provision in its corporate charter that requires shareholders to litigate claims in Delaware. According to Laster, companies with forum selection clauses shouldn’t expect Delaware judges to block their colleagues in other states from hearing shareholder cases, at least until the corporations have asked judges outside of Delaware to enforce the provisions and dismiss shareholder suits. “When I review the Chevron decision,” Laster wrote, “it is seemingly apparent on the face of that decision that Chancellor Strine contemplated, at least for purposes of his ruling in that case, that the forum selection provision would be considered in the first instance by the other court.”
The judge declined to grant Edgen an anti-suit injunction to block a shareholder suit in Louisiana, even though Edgen’s lawyers (from Morris James and Dechert) warned that the case could potentially interfere with Sumitomo Corp’s $12-per-share offer for the drilling equipment company – and even though Laster called the underlying shareholder claim “exceedingly weak” and castigated plaintiffs’ lawyers at Robbins Geller Rudman & Dowd for “unsatisfying and, dare I say, pathetic representational contortions” seemingly designed to preserve an argument that Delaware doesn’t have personal jurisdiction over the shareholder who sued in Louisiana. The Delaware Supreme Court made clear in its decision last spring dismissing a derivative suit against Allergan’s board that it expects Chancery Court to respect rulings by sister state and federal courts under the Full Faith and Credit Clause of the U.S. Constitution. Laster’s decision in the Edgen case shows that Chancery took to heart the state supreme court’s admonitions about intrastate comity, even when corporations have specified Delaware as their forum of choice.
For Edgen, Laster’s ruling means that it must attempt to win the dismissal of the Louisiana case before it can get help from Chancery Court. That suit was filed by a Canadian shareholder named Jason Genoud after Edgen announced in October that it had agreed to Sumitomo’s $12 per share offer. The offer represents a 55 percent premium over Edgen’s trading price and treats Edgen’s controlling shareholders no differently from minority owners, but Genoud nevertheless sued the board for breach of fiduciary duty in state court in Baton Rouge, where the company is headquartered. In a Nov. 6 letter to Vice Chancellor Laster, Genoud counsel Randall Baron of Robbins Geller explained that the shareholder wanted to challenge Edgen’s forum selection provision, which was “unilaterally adopted” in an amendment to offering documents in Edgen’s IPO in April 2012. “We believed that the civil law system in Louisiana would allow the court to assess the validity of the provision under Louisiana contract law without undue reliance on the Delaware precedent in Boilermakers that we do not believe should be followed outside of Delaware,” Baron wrote.
Edgen sued Genoud in Delaware, seeking an injunction to bar the Louisiana case from moving forward. Unless Laster enforced Edgen’s forum selection clause, the company argued, it risked irreparable harm if the Louisiana court enjoined the Sumitomo deal. That injunction, Edgen said, could even come before a decision on the company’s motion to dismiss Genoud’s case under its forum selection clause. “Common sense suggests that there would be some sequence in Louisiana that would have our forum motion decided prior to the injunction motion, but there is no guarantee as to sequence,” Edgen counsel Joseph Slights of Morris James told Laster. “And if this transaction is enjoined in Louisiana – we don’t think it should be, but if it is, it’s too late for us to really seek to invoke our exclusive forum provision at that point.”
Laster was sympathetic, especially because he was so skeptical about Genoud’s claims. “This case really exemplifies the interforum dynamics that have allowed plaintiff’s counsel to extract settlements in M&A litigation and that have generated truly absurdly high rates of litigation challenging transactions,” he said. “It also demonstrates why corporations have seen fit to respond with forum selection provisions in an effort to reduce the ability of plaintiff’s counsel to extract rents from what is really a market externality.” The vice chancellor was also notably irritated that Robbins Geller insisted it did not represent Genoud in the Delaware case, although it is handling the Louisiana case for him. Genoud had refused to accept service of Edgen’s case, and Laster implied that Robbins Geller made a tactical decision to contest the Delaware court’s jurisdiction over the shareholder. Laster called that strategy “quite disappointing behavior from a firm that otherwise has done a great deal to build up reputational capital and credibility with the Delaware courts.”
The Louisiana suit, he said, clearly violated Edgen’s forum selection clause. But Laster concluded that precedent on forum selection clauses, whether in bylaws or corporate charters, is simply too undeveloped to grant anti-suit injunctions as a first recourse for Edgen. “It may be that in the right case an anti-suit injunction is appropriate, but I do think that Chevron suggests that primacy should be given in the first instance to the non-contractually selected forum,” he said.
Wachtell, Lipton, Rosen & Katz, which has championed forum selection clauses, chose to regard Laster’s decision as a glass half-full, emphasizing the judge’s finding that Edgen’s charter provision is presumptively valid. But in a phone interview, Baron of Robbins Geller told me Laster appropriately concluded that it’s up to non-Delaware courts to decide how much deference to give to forum selection clauses. “We know the bylaws are valid in Delaware,” he said. “The next question is to what extent each jurisdiction is obligated to give full faith and credit to those holdings.”
In an email, Baron also responded to Laster’s comments about his firm’s strategy: “Vice Chancellor Laster is one of the best jurists in the country and clearly an expert in Delaware law,” he said. “I understand his desire to have Delaware courts hear issues on Delaware law. That said, our client was legally entitled to file and have the forum selection clause issue decided in the principle place of business of Edgen. And our client is legally entitled to assure that Defendants properly served him and had personal jurisdiction over him before subjecting him to orders in the forum of their choice.”
Edgen counsel at Morris James didn’t respond to my phone messages.
(Reporting by Alison Frankel)