Opinion

Alison Frankel

Delaware judge OKs forum selection clause adopted on same day as deal

Alison Frankel
Sep 9, 2014 21:18 UTC

Chancellor Andre Bouchard of Delaware Chancery Court struck a double blow Monday for corporations that want to restrict shareholder litigation to a single jurisdiction. In a decision upholding the validity of a bylaw requiring shareholders of First Citizens Bancshares to sue board members only in North Carolina, Bouchard ruled that Delaware corporations can designate venues other than Delaware as the exclusive forum for shareholder claims – an issue of first impression in Chancery Court. But that wasn’t all. Bouchard also rejected shareholder arguments that First Citizens’ forum selection clause can’t be enforced because it was enacted on the same day that the North Carolina bank announced its $676 million acquisition of a related First Citizens entity in South Carolina.

According to First Citizens’ lawyer Sandra Goldstein of Cravath Swaine & Moore, Bouchard’s ruling is the first to uphold a forum selection bylaw adopted in connection with a merger (and in anticipation of the inevitable shareholder suits that follow M&A deals). In an interview Tuesday, Goldstein predicted that the chancellor’s reasoning on the timing of First Citizens’ bylaw will turn out to be of broader significance than his holding on non-Delaware jurisdictions, since most forum selection clauses direct all shareholder litigation to Delaware.

Bouchard said that First Citizens shareholders hadn’t shown that the board had an improper motive in restricting litigation to a single venue just because directors adopted the clause in connection with a merger. The First Citizens clause doesn’t preclude shareholder suits, he said; it just regulates where they can be filed. “That the board adopted it on an allegedly ‘cloudy’ day when it entered into the merger agreement with FC South rather than on a ‘clear’ day is immaterial given the lack of any well-pled allegations … demonstrating any impropriety in this timing,” Bouchard wrote.

“The chancellor said it’s a completely appropriate purpose for the board to decide it only wants to be sued in one place (and) it’s not inappropriate to adopt the clause at the time of the merger,” Goldstein said. “You’re not shielding yourself from liability … You’re saying, ‘Sure, sue us, but sue us in one jurisdiction, not multiple forums.’”

Under Bouchard’s ruling, First Citizens shareholders – who are represented by Labaton Sucharow – can still try to challenge the board’s approval of the merger, but in North Carolina instead of Delaware. Goldstein said, however, that if plaintiffs try in North Carolina litigation to revive claims that First Citizens directors breached their duty by adopting the forum selection bylaw, she will argue that Bouchard has already decided that question. (Plaintiffs’ lawyer Ned Weinberger of Labaton told me that his team is still reviewing Bouchard’s opinion and considering its options.)

Early test of Delaware ‘loser pays’ bylaws looms in Biolase dispute

Alison Frankel
Jul 8, 2014 21:19 UTC

(Reuters) – On Monday, a Delaware shareholder firm issued a press release urging shareholders of the dental laser company Biolase to get in touch if they’re concerned about allegations that board members leaked corporate financials, among other supposed shenanigans. You know what that means: Class action firms are circling the beleaguered company, looking for a reason to file a shareholder derivative suit accusing Biolase’s board of breaching its duties.

Meanwhile, Biolase’s former chairman and CEO — ousted in June after months of fighting in Delaware courts to keep his job — has sent a demand for books and records to the company’s board. Deposed CEO Federico Pignatelli claims that his fellow Biolase directors are working for their own interests, not for shareholders. Represented by Baker Marquart, he’s spoiling to keep litigating against the directors who tossed him out.

That’s a risky proposition for Pignatelli and for Delaware shareholders. At the same June 26 meeting at which the board got rid of Pignatelli, Biolase became one of the first public companies in Delaware to adopt a “loser pays’ fee-shifting bylaw.

Strine: Stop shareholder activism from hurting American investors

Alison Frankel
Mar 25, 2014 19:32 UTC

This country’s most important arbiter of corporate law – Chief Justice Leo Strine of the Delaware Supreme Court – believes that shareholder democracy has run amok. In a startling new essay for the Columbia Law Review, “Can We Do Better by Ordinary Investors?” Strine outlines the deleterious long-term effects of subjecting corporate decision-makers to shareholder votes dominated by short-term investors. These ill consequences range, according to Strine, from the outright dollars corporations must spend to educate shareholders about everything they’re entitled to vote on all the way to excessive risk-taking and regulatory corner-cutting by executives and directors worried about delivering quick returns lest they be ousted by shareholders. Strine is deeply worried about a divergence of interests between money managers, who wield the power of shareholder votes, and ordinary investors in their funds, who are typically saving for retirement or their kids’ education. He’s convinced that the entire American economy will suffer unless short-term investors are reined in.

Strine’s diagnosis is interesting enough, though he’s previously written about what he considers to be the cancer of short-term investing. In the new essay, though, he also suggests a cure: eight actual suggestions to restore power to corporate boards and long-term investors (plus a pie-in-the-sky fantasy about changing the U.S. tax code to encourage shareholders to take a long view of their investments). Strine, who calls himself “someone who embraces the incrementalist, pragmatic, liberal tradition of addressing the world as it actually is,” argues that his proposals do not roll back shareholders’ hard-won rights to a voice in corporate affairs. Instead, he says, he’s “trying to create a system for use of those rights that is more beneficial to the creation of durable wealth for them and for society as a whole.”

The proposals make Strine’s paper indispensable reading if you run a corporation or advise corporate decision-makers. Even if you’re put off by his somewhat tedious rhetorical device of styling the essay as a response to Harvard Law professor Lucien Bebchuk – who advocates relentlessly for expanding shareholders’ franchise and apparently plays Dungeons & Dragons – or by the 154 dense footnotes in Strine’s 54-page article, you should take a look at his suggestions, which begin on page 29. Strine has done more thinking, reading and writing about the real-world consequences of shareholder power than anyone I can think of. He spent 16 years, after all, as a judge in Delaware Chancery Court, three of them as chancellor, before ascending to the Supreme Court this year. And based on those 154 footnotes, Strine seems to have devoted most of his time off of the bench to reading academic papers on corporate governance and shareholder rights. (Or, at least, whatever he could spare from keeping abreast of pop culture.)

New Delaware Supreme Court nominee Strine speaks! (Well, sort of)

Alison Frankel
Jan 8, 2014 21:03 UTC

On Wednesday, Delaware Governor Jack Markell nominated Chancellor Leo Strine of Chancery Court to become chief justice of the state’s Supreme Court. Assuming Strine’s nomination is approved, Chancery Court is going to be a much less colorful place. Strine is a legal mastermind – with an unpredictable and outspoken judicial demeanor. Occasionally, his off-tangent courtroom riffs have landed him in trouble. In 2012, for instance, Strine said he regretted comments he made during a hearing involving fashion entrepreneur Tory Burch in which he asked her attorney if Burch is Jewish and compared her dispute with her former husband to a “drunken WASP-fest.” Strine was also gently chided last year by his future colleagues on the Delaware Supreme Court for using judicial opinions to express his “world views.”

My Reuters colleague Tom Hals has been covering Strine in court for years. Unfortunately, the chancellor has repeatedly declined to sit down for a formal interview with Reuters. So to celebrate his nomination, we’ve constructed an imaginary Q&A. Well, partly imaginary. We’ve made up the questions, but all of Strine’s “answers” are verbatim quotes – albeit out of context – from his courtroom comments or opinions.

Reuters: You’re well known for your work as a judge. But tell us a bit about you as a person.

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