With reference to my post about the Airgas decions, a friend (let's call him Emeritus) emailed:
Forgive my naivete, but as I read your blog this morning I wondered why there is not more concern about the substantial role played by the judiciary in the corporate decision-making process. Suppose the judge in an Airgas-type case is not Chandler or some other Delaware chancellor but, rather, some lefty California judge like Traynor and the acquisition is one that organized labor considers good for its members. You seem to assume substantial good-faith deference to the board. That may be the rule but ....
This is a particularly good question in light of the recent discussion about plaintiffs bringing Delaware law-based claims in non-Delaware courts. See, e.g., Brian Quinn's article, in which he argues that:
Observers have noted a trend of shareholder lawsuits migrating out of Delaware. This trend appears to be part of a litigation strategy to avoid Delaware’s more aggressive policing of agency costs in acquisition-related shareholder litigation. To the extent litigation strategies are driven by agency costs, litigation can be costly to shareholders without much by way of tangible benefits to them. In addition to be potentially wasteful for shareholders a sustained outward migration of cases from Delaware may threaten Delaware’s ability to maintain its position as the nation’s center of corporate law. Consequently, the out-of-Delaware trend deserves attention. Some commentators have proposed that firms adopt forum selection provisions in their corporate charters as a way of reducing incentives for shareholder plaintiffs to engage in judicial arbitrage. There is some merit to a self-help approach. However, to date few firms have adopted such a strategy. This Article argues that notwithstanding the fact that incorporators are free to contract around default rules and adopt innovative self-help provisions, status quo bias in contracting reduces incentives for them to do so. In order to help shareholders and firms overcome status quo bias, an opt-in menu approach that facilitates flexibility in corporate contracting to may be helpful to incorporators in overcoming cognitive constraints to innovation.
Francis Pileggi recently discussed a federal case refusing to enforce a forum selection bylaw:
A fair amount of legal scholarship has focused recently on providing for the selection of a litigation forum in the organizational documents of a corporation. Professor Joseph Grundfest has been a prime proponent of the idea and we wrote here about a speech he gave about it recently. Professor Steven Davidoff has written about it here. A decision of the Delaware Court of Chancery last year intimated the legitimacy of the concept in the case of In re Revlon, Inc. Shareholders Litigation, 990 A.2d 940, 960 (Del. Ch., 2010).
Just this week, however, one federal judge in California decided he was not willing to "join the party" on this concept. In Galaviz v. Berg, N.D. CA, No. C 10-3392-RS (Jan. 3, 2011), available here, the U.S. District Court for the Northern District of California applied federal law to reject the argument that directors can amend bylaws to require (without seeking shareholder approval), all derivative suits to be filed in a particular jurisidiction, such as the state of formation. The Court did not make its decision based on Delaware law. The Court also suggested that the analysis would be different if the forum selection clause, requiring derivative suits against the company to be filed exclusively in Delaware, were made a part of the corporate charter instead of the bylaws only. Reportedly, this is the first reported decision to address the issue directly. Jim Hamilton has a helfpul post about this case here.
I think the issue Emeritus raises is an argument in favor of putting choice of forum provisions into articles of incorporation and in favor of courts enforcing them. Keeping these cases in Delaware courts strikes me as preferable. Expert judges. No juries. No home state bias in favor of one side or the other, since usually both sides will have their principal place of business elsewhere. Promotes consistency of outcomes. Delaware courts more rigorous than most in policing plaintiff lawyers bringing suits not in the best interests of the corporation or its shareholders as a whole.
