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Choice of forum and corporate governance

Choice-of-forum provisions are potentially important in all contracts.  Not only can they match the parties with expert and efficient adjudicators, but they can reinforce a choice-of-law clause because courts tend to apply forum law.  See The Law Market, Ch. 4. 

Choice of forum is getting a lot of attention in corporate law.  Delaware has long been the state of choice for business associations not so much because of its law, which other jurisdictions can readily replicate, but for its courts and legal infrastructure.  Here’s recent evidence of this in the LLC context.  Yet, surprisingly, there?s evidence (discussed here) that Delaware is losing its cases — that is, non-Delaware courts are hearing cases involving governance of Delaware-incorporated firms.  

According to another recent paper by Armour, Black & Cheffins, which Bernie Black presented at Illinois, the reason for Delaware?s loss of cases is that it has been getting less friendly to plaintiffs? lawyers, particularly regarding fees.  Delaware’s ?balancing act? this paper’s title refers to is between being shareholder-friendly and lawyer-friendly.

The solution would seem to be easy:  a Delaware choice of forum clause.  There?s evidence here and here that choice of forum clauses are widely used in merger agreements.  But per Grundfest (HT Pileggi) these are relatively little used in publicly held firms ? only 39, or .4%, of the firms filing 10Ks in 2009, of which 14 were publicly held LLCs or LPs, themselves only a small fraction of the total publicly held firms. But Grundfest also shows that use has sharply increased since the Chancery court suggested Delaware forum-choice charter provisions in last March’s Revlon case. 

It is not clear that a non-Delaware court must or will enforce a Delaware-only forum choice clause.  See Armour, Black, Cheffins, above. There are also statutory nuances concerning whether the clause must be in the charter or whether it?s enough that the directors insert it in the bylaws.  Non-Delaware courts probably are significantly more likely to force parties to litigate in Delaware if the firm?s owners have consented.  The relative ease of getting owner consent in uncorporations, and the lack of need for this in merger agreements, might explain the greater use of forum choice provisions in these contexts.

Given that a forum choice provision increases the chances of a corporate case being heard in Delaware, and evidence that firms are choosing Delaware incorporation for its courts, it would seem obvious that Delaware corporations would want to increase their odds of getting a Delaware forum by amending their charters to include choice-of-forum provisions.  Right?

Except that, as noted above, shareholders’ lawyers may not want this because their fees are likely to be lower in shareholder suits brought in Delaware than in those brought elsewhere.  But it?s not the lawyers who vote on these provisions, it?s the shareholders. Right?

But who are the ?shareholders??  Might activists like unions and public funds use their increasing power (thanks to Dodd-Frank, among other things) to block moves toward forum-choice amendments?  If so, would that be in the interests of shareholders generally? It will be interesting to see if the formerly obscure area of choice-of-forum clauses becomes the next leading edge of shareholder activism.

Filed under: corporate governance, Jurisdictional competition

Full post as published by Truth on the Market on October 10, 2010 (boomark / email).