Since a series of decisions several years ago in which Delaware's judges expressed skepticism of plaintiffs' lawyers' conduct and motives, the Delaware bench and bar have worried about losing litigation involving companies incorporated in the state. Those rulings inspired a trend toward bringing shareholder suits in venues other than Delaware, reducing the state's market share in corporate litigation and its ability to control the development of its law. Two recent cases from the Court of Chancery attempt to strike back by blessing charter provisions that specify a forum for intra-entity disputes on the assumption that such provisions would opt for Delaware.
In a suit brought by shareholders of Revlon Inc. this year, Vice Chancellor J. Travis Laster replaced the plaintiffs' lead counsel. He acknowledged that "greater judicial oversight" of lawyers and law firms that bring shareholder strike suits might cause them to look to other venues but suggested companies could respond with a charter provision, a suggestion that Wachtell, Lipton, Rosen & Katz partner Theodore Mir-
vis has promoted in recent years.
Laster cited a 2007 article about Mirvis' stance as well as two recent law review articles on the validity of forum selection clauses. But, Laster acknowledged, "a provision selecting an exclusive forum for intra-entity disputes need not choose the Delaware courts. I can envision that the Delaware courts would retain some measure of inherent residual authority so that entities created under the authority of Delaware law could not wholly exempt themselves from Delaware oversight. The issues implicated by an exclusive forum selection provision must await resolution in an appropriate case."
Laster's colleague Donald Parsons Jr. offered such a ruling on May 13 in Baker v. Impact Holding Inc., where the vice chancellor gave effect to a forum selection clause in a shareholder agreement that requires that all actions be brought in a Dallas court. The Delaware legislature has barred similar forum selection clauses "with respect to nonmanager members of limited liability companies and limited partners" but "did not do so in the corporate context."
The Baker opinion suggests a provision in a corporate charter selecting Delaware as the exclusive venue for litigation would be legal under the state's law. But Wachtell partner William Savitt wrote in a recent column in The National Law Journal, "Exclusive venue selection provisions are not a certain solution. Their enforceability will generally turn on the decision of the nonincorporating state court, often in the state of corporate headquarters, as to whether to respect the provision. In individual cases, these courts may face substantial equitable arguments in favor of retaining jurisdiction."
Delaware Supreme Court Chief Justice Myron Steele issued a ruling May 21 that "recognizes a single, inseparable fraud when directors cover massive wrongdoing with an otherwise permissible merger." By allowing shareholders to sue directors and officers who engage in such fraud even after they consummate an agreement to sell a company, the ruling means that Delaware courts will be able to have a role in such situations rather than cede them to federal courts.
Steele's opinion came in a shareholder suit against Countrywide Financial Corp., which agreed to sell to Bank of America Corp. in 2008. The court upheld Vice Chancellor John Noble's approval of the suit's settlement. One shareholder, Arkansas Teacher Retirement System, or TRS, sought to pursue derivative claims against Countrywide's directors and officers, but Noble held those claims were worthless. The Supreme Court agreed "because Delaware law does not require directors to value or preserve piecemeal assets in a merger setting."
But the court went on to hold that Delaware law might have allowed for such claims in this case had TRS framed them differently. "Other than in instances of fraud or reorganization," the court wrote, a shareholder "loses standing to maintain a derivative suit where the corporation merges with another company" unless the merger "is the subject of a claim of fraud being perpetrated merely to deprive stockholders of the standing to bring a derivative action." Such claims are usually grounded on allegations that a board "inadequately priced or improperly conducted a corporate merger," the court wrote, "but its terms apply more broadly to fraud connected to the merger," including the insider trading, improper stock repurchases and predatory lending in which Countrywide was said to have engaged. "An otherwise pristine merger cannot absolve fiduciaries from accountability for fraudulent conduct that necessitated that merger," Steele wrote.
David Marcus is senior writer at Corporate Control Alert.