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.