Forum selection clauses are killing multiforum M&A litigation
It was entirely predictable that last spring, after Safeway announced that it had agreed to accept a $9.2 billion offer from the private equity firm Cerberus Capital, shareholders would rush to file suits challenging the deal. As you know, shareholder M&A suits have become an inevitable consequence of merger announcements, and, to the frustration of defendants, are often brought in more than one jurisdiction — which has meant, in years past, that if defendants couldn’t persuade judges to defer to other courts, they sometimes had to defend against the same claims by multiple plaintiffs firms in multiple courts.
Defendants thought they’d at least solved the multiforum problem a year ago, when then Chancellor Leo Strine ruled in Boilermakers v. Chevron that corporations may adopt and enforce bylaws requiring shareholders to bring suits in Delaware. The plaintiffs firms that had challenged bylaws adopted by Chevron and Fedex decided not to appeal Strine’s decision to the Delaware Supreme Court, though the state justices may yet have a say on Chevron’s forum selection clause via a parallel shareholder suit that was filed in federal court in San Francisco. (U.S. District Judge William Alsup has said he may certify the bylaw validity to the Delaware Supreme Court in that case.) Under prevailing Delaware precedent, the only way forum selection bylaws wouldn’t work for Delaware corporations was if judges in other jurisdictions refused to honor the provisions.
So far, all of the out-of-state judges to consider Delaware forum selection bylaws have deferred to the provisions — with the California state judge presiding over a wing of the Safeway litigation the latest to rule that a forum bylaw is enforceable. (Sullivan & Cromwell has a client alert describing all four decisions; I first heard about the S&C memo from The Chancery Daily.)
The California ruling, by Judge Wynne Carvill of Alameda County Superior Court, is particularly good news for Delaware corporations that have adopted or are contemplating a forum selection bylaw amendment directing shareholder litigation to Chancery Court. And now lawyers for Safeway and Cerberus are using it to try to erase yet more Safeway shareholder M&A class actions in federal court. It’s worth paying attention to what happens next in this case: If the Safeway shareholder litigation turns out to be a paradigm of M&A class actions in the age of forum selection clauses, plaintiffs lawyers are going to be collecting less in deal taxes than they’re accustomed to.
Safeway’s board adopted its forum selection bylaw amendment in October 2013, after the company began exploring a sale but before any agreement with Cerberus. That deal was announced on March 6, and, almost immediately, seven shareholders sued in Delaware and four others in Alameda County. The Delaware cases were consolidated before Vice-Chancellor Travis Laster, who appointed Bernstein Litowitz Berger & Grossmann, Grant & Eisenhofer, Kessler Topaz Meltzer & Check and Saxena White as lead counsel (with another four firms as members of an “executive committee”). Safeway agreed to expedited discovery in the Delaware litigation.
Robbins Geller Rudman & Dowd — which didn’t have a role in the Delaware litigation — meanwhile took the lead in the four California state court cases. Safeway’s lawyers at Latham & Watkins and Cerberus counsel from Dechert moved to dismiss the California suits, citing Safeway’s recently enacted forum selection clause.
Robbins Geller’s argument against dismissal rested on a 2011 case, Galaviz v. Berg, in which San Francisco federal judge Richard Seeborg refused to dismiss a shareholder derivative suit against Oracle’s board, despite a forum selection clause directing shareholder litigation to Delaware. Robbins Geller contended that Safeway’s clause was unenforceable because the board adopted it unilaterally, without consent from shareholders, at a time when the company was already up for sale and anticipating shareholder litigation. Safeway and Cerberus countered that the Galaviz ruling came before Delaware established in the Boilermakers decision that forum selection clauses are valid as a matter of state corporate law.
Galaviz precedent was considered shareholders’ best shot at invalidating the clauses outside of Delaware, so it was notably discouraging for plaintiffs lawyers when Judge Carvill sided with Safeway and Cerberus in his May 14 ruling. He explicitly recognized that the circumstances in the Safeway case, which involved applying a forum selection clause, were different from those in the Boilermakers’ litigation in Delaware, in which Strine upheld the Chevron and FedEx provisions. Nevertheless, he said, “plaintiffs have failed to demonstrate that application of the forum selection bylaws would be unreasonable in this situation.”
Robbins Geller was considering an appeal, but on June 13, Safeway reached a settlement in the Delaware litigation that, if approved, will release all shareholder claims. (The company granted shareholders some contingent rights and beefed up proxy disclosures.) Robbins partner David Wissbroecker told me that Carvill’s decision was tied closely to the circumstances of Safeway’s adoption of its forum selection clause and shouldn’t be read as a repudiation of Galaviz. “We’ll keep presenting these arguments when we think it’s appropriate,” he said.
That’s why yet another wing of the Safeway shareholder litigation — three late-to-the-game M&A suits filed in federal court in Oakland and consolidated before U.S. District Judge Jeffrey White — is important: The federal litigation could resolve any remaining doubt about the Galaviz precedent. In the latest filing in the federal-court cases, Safeway cited Judge Carvill’s forum selection ruling, as well as the settlement of the Delaware wing of the litigation, to oppose plaintiffs’ motion for an injunction against a shareholder vote on the Cerberus merger. “The court should recognize plaintiffs’ motion for what it is: a lawyer-driven effort to extract attorneys’ fees by imposing litigation burdens and creating a risk of delay,” the brief said. (I emailed plaintiffs lawyers from Robbins Arroyo requesting comment but a firm representative said they were not available.)
Shareholder lawyers don’t give up easily, and there are still some interesting challenges to be made to forum selection bylaws, including constitutional issues under the Dormant Commerce Clause. Some judges from states other than Delaware might not be happy about corporations adopting bylaws that effectively rob them of jurisdiction (and business). But if the trend of decisions upholding the clauses continues, plaintiffs lawyers will have no incentive to keep filing cases outside of Delaware.
For more of my posts, please go toÂ WestlawNext Practitioner Insights