How corporations can game their own forum selection clauses

November 17, 2015

(Reuters) – I wouldn’t ordinarily cover Utah state-court shareholder litigation over a $115 million deal but I’m worried about the implications of a forum selection dispute fomented by FX Energy, an oil and gas exploration company that announced its sale to Orlen Upstream last month.

After the announcement, FX shareholders sued. No surprise there. Shareholders almost always sue after deals valued at more than $100 million (though, as I reported yesterday, that trend may be changing). FX had adopted a forum selection clause in 2014, requiring shareholders to litigate in Utah, where the company is based. Robbins Geller Rudman & Dowd filed its case in state court in Salt Lake City. Several other plaintiffs’ firms, including Harwood Feffer, Rigrodsky & Long and the Rosen Law Firm, sued FX and its board members in state court in Las Vegas, citing FX’s Nevada incorporation.

FX’s lawyers at Bracewell Giuliani moved to stay litigation in one of those places. But if you were thinking that the company wants to litigate in Utah – the jurisdiction it chose in its 2014 forum selection clause – you would be wrong. FX informed the court in Utah that it wants to litigate in Nevada.

The company’s rationale is that Nevada law will apply to the shareholders’ claims. Of course, the company already knew that Nevada law would apply to shareholder litigation when it adopted its Utah forum selection clause in 2014, so you could argue that it has already acknowledged Utah’s ability to interpret Nevada law. According to FX, that doesn’t really matter. Its forum selection provision, it said, gives the company the option of requiring shareholders to litigate in Utah. In this instance, FX said, it is choosing not to exercise its option.

Robbins Geller suspects untoward motives. In its Nov. 16 opposition to the FX stay motion, the firm accused the company of attempting a “reverse auction”: maneuvering to reach a settlement with “ineffectual” shareholder lawyers instead of Robbins Geller. The motion said the plaintiffs’ firms suing FX in Las Vegas are all second-tier shops “that often settle these cases quickly and give away shareholders’ claims as part of a global release while providing no material benefits to the class.” By contrast, Robbins Geller said, it is among a handful of top-tier firms known for litigating aggressively and chasing big-money damages when they are warranted.

“The court should deny defendants’ motion, reject their attempt at a reverse auction, and act to protect the interests of all shareholders of FX Energy by ensuring that their claims are litigated by a top-tier plaintiffs’ firm,” the Robbins motion said.

This particular squabble will soon be sorted out. Judge Laura Scott of Salt Lake City district court is scheduled to hear arguments on FX’s stay motion on Tuesday afternoon. There’s also a hearing in Las Vegas on a preliminary injunction motion in the case brought by Harwood Feffer. One way or another, the judges in these two jurisdictions will figure out where the FX case is to be litigated.

But the FX scenario raises a bigger issue of whether corporations that purportedly adopted forum selection bylaws to stop shareholders from judge shopping are going to be able to use the provisions to exactly that end.

That could become a crucial question because of this summer’s revolution in Delaware M&A shareholder litigation. As you know, judges in Delaware Chancery Court have basically declared they will no longer approve settlements that deliver only meaningless disclosures to investors in exchange for “intergalactic” releases of shareholders’ potential claims (and, oh yeah, handsome fees for plaintiffs’ lawyers). Their recent rulings, especially transcripts from settlement hearings, have discussed the uncomfortable truth that corporate defendants were complicit in the explosion of disclosure-only settlements because the broad releases they obtained were a form of “deal insurance.”

Hundreds of corporations have enacted forum selection provisions directing shareholder litigation to Delaware, but if they can’t get cheap shareholder releases from disclosure-only settlements in Delaware, will they stop enforcing their own jurisdictional bylaws?

FX appears to be the first public company to repudiate its own forum selection clause and opt to defend itself in another jurisdiction. If it’s allowed to continue litigating in Nevada, it may not be the last.

Harwood Feffer partner Benjamin Sachs-Michaels said the firm does not comment on pending cases. I left messages for lawyers from Rigrodsky & Long and The Rosen Firm, requesting comment on Robbins Geller’s assertions. I did not hear back. An FX Energy representative and FX lawyers from Bracewell also did not return calls.

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